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Hard money loans are a type of financing that can be useful for real estate investors or homeowners who need funds quickly. Unlike traditional mortgages from banks, hard money loans come from private lenders and have less stringent requirements However, there are still certain criteria borrowers must meet to qualify In this comprehensive guide, we’ll explain everything you need to know about hard money loan requirements.
What is a Hard Money Loan?
A hard money loan is a short-term loan issued by private lenders, rather than banks or credit unions. The loans are usually secured by real estate, meaning the property acts as collateral if the borrower defaults.
Hard money loans are ideal for real estate investors who want to purchase and renovate a property quickly and sell it for a profit. They are also used by homeowners who need funds fast but may not qualify for a traditional mortgage.
Unlike regular mortgages hard money loans are based more on the value of the collateral rather than the borrower’s income and credit score. This allows borrowers who may not qualify for a conventional loan to still access financing.
Hard Money Loan Requirements
While hard money lenders don’t emphasize credit scores and debt-to-income ratios as much there are still certain requirements borrowers must meet
Loan-to-Value Ratio
The loan-to-value (LTV) ratio compares the amount of the loan to the appraised value of the property securing it. Hard money lenders usually require an LTV between 60% and 75%. This means if you need a $100,000 hard money loan, the property must appraise for at least $133,333 to $166,666.
A lower LTV protects the lender in case they have to foreclose and sell the property to recoup their investment. Some lenders may go up to 80% or 85% LTV for borrowers with a proven track record.
Down Payment Amount
Along with LTV requirements, hard money lenders also stipulate a minimum down payment amount. This is usually between 15% and 25% of the purchase price or appraised value.
So if you buy a property for $200,000, you may need a down payment of $40,000 (20% of purchase price) to qualify for a hard money loan. Coming up with a hefty down payment ensures the lender you have “skin in the game”.
Credit Score
While hard money lenders emphasize collateral value more than your creditworthiness, a minimum credit score is still often required. This is usually around 600, although some lenders may accept scores in the 500s.
Having a credit score of at least 600 shows the lender you have the financial responsibility to make loan payments. A lower score means you pose a higher risk of default.
Debt-to-Income Ratio
Your debt-to-income (DTI) ratio compares your monthly debt payments to your gross monthly income. Most hard money lenders want this ratio to be 50% or less.
If your total monthly debt payments are $2,000 and your gross monthly income is $5,000, your DTI is 40% ($2,000/$5,000). This shows the lender you can afford the new loan payment.
Property Type
Hard money loans are frequently used to finance the purchase and rehab of non-owner-occupied investment properties, like single-family rentals, multifamily properties, and commercial real estate.
Some lenders shy away from owner-occupied properties because they view investment properties as lower risk. Vacation homes may also be restricted.
Experience
Many hard money lenders prefer to work with experienced real estate investors who have a proven track record, rather than first-timers. Having successfully purchased and sold properties in the past gives the lender confidence you can repay the loan.
How to Improve Your Chances
If your credit score or debt-to-income ratio fall slightly short of a lender’s requirements, there are some things you can do to boost your chances of approval:
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Make a larger down payment – Putting down 30% to 35% instead of 20% shows the lender you’re committed to the property.
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Use a co-signer – Ask a family member or business partner with better credit to co-sign the loan with you. Their stats will help balance out your application.
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Pay points – You can pay upfront fees, known as points, to reduce the interest rate and monthly payments on the loan. Each point is usually 1% of the loan amount. Paying points signals low risk to the lender.
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Use a hard money broker – A broker pools funds from multiple lenders. This gives them more lending power so they may be able to get you approved when one lender declines. The broker fee is usually 2% to 5% of the loan amount.
Common Hard Money Loan Uses
Hard money loans allow real estate investors and homeowners flexibility in how they can use the funds. Here are some of the most popular uses for these loans:
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Purchase investment property – Investors often use hard money loans for quick financing to purchase properties at auction or through off-market deals that need to close fast.
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Rehab existing property – Loans can fund repairs or renovations to distressed properties so they can be resold for a profit.
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Bridge financing – Borrowers can use hard money loans to bridge the gap when buying a new property before selling their existing home.
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Pay off liens – Hard money can pay off outstanding tax or mechanic’s liens so the owner can sell or refinance the property.
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Avoid foreclosure – Homeowners facing foreclosure can get a hard money loan to pay off their mortgage and avoid losing their home.
The Pros and Cons
Hard money loans provide fast access to capital but there are some potential drawbacks to weigh as well:
Pros
- Fast funding, often in a week or less
- Based on collateral value rather than borrower credit
- Less documentation required
- Money can be used for anything real estate related
Cons
- High interest rates from 10% to 15%
- Large down payments required
- Short repayment terms of 1 to 3 years
- Costs like origination fees and closing costs
The Bottom Line
Hard money loans fill a unique niche, providing financing that traditional lenders won’t. But they come at a price with higher rates and costs. If you need funds quickly for real estate investment, determine if you can meet the lender’s requirements. A large down payment, moderate credit score and experience with real estate improve your chances of getting approved. With the right planning, hard money can be a useful tool for your next deal.
Pros of hard money loans
- Flexible loan terms: Hard money lenders tend to be flexible when it comes to negotiating loan terms. They don’t have to adhere to the same regulations that conventional mortgage lenders are subject to.
- Speedy funds: Compared with the glacial pace of traditional mortgage underwriting, hard money loans can be processed in just days. For real estate investors, speed can sometimes make all the difference when it comes to closing a deal — for example, when bidding on a competitive property at auction.
- Don’t require a strong credit history: You don’t need a good credit score or loads of financial documentation to get a hard money loan. While traditional mortgage underwriting focuses on borrower income and credit history, hard money lenders extend loans based on collateral, such as a house or building. For this reason, hard money lenders need to know the estimated market value (after-repair value) of the property after the planned renovations are completed.
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How To Get A Hard Money Loan In 2024
FAQ
What credit score is needed for a hard money loan?
Is it difficult to get a hard money loan?
What are typical terms for a hard money loan?
How long does it take to get a hard money loan?
Hard money loans have a faster approval process compared to traditional mortgages or other types of secured loans. You may close in just a few days with a hard money loan, unlike applying for a mortgage which can take more than a month.
Do hard money loans require a credit check?
Unlike traditional mortgages, hard money loans have different requirements when compared to home loans. But every lender has different eligibility requirements for approval. Because many hard money lenders don’t require credit checks, they typically rely solely on the value of the collateral securing the loan.
What is a hard money loan?
A hard money loan is a secured, short-term loan often used to finance a home purchase. Real estate investors commonly rely on hard money loans to manage multiple flip projects. Hard money loans deliver cash quickly but at a higher interest rate compared to other types of financing. Hard money loans are a way of borrowing funds over the short term.
When do you need a hard money loan?
People typically look for hard money loans when they are interested in investing in real estate that needs repairs. Amateur real estate investors who may not have another way of securing financing — or who may just need money fast — rely on hard money loans for: • Purchasing real estate to fix up and rent out