A Comprehensive Guide to Hard Money Loan Guidelines

But why would someone choose a hard money loan over a conventional one? What are the prerequisites for a hard money loan?

When buying a new house, many Americans use typical bank loans. However, traditional bank loans are more challenging to get than hard loans.

The number of property flips in America is significant. For example, there were approximately 300,000 fix-and-flips in 2016, representing a $56 billion business.

Homeownership rates are high at around 65%, whether a buyer is looking to acquire a fixer-upper or a recently remodeled house.

Continue reading to find out how to get a hard money loan and the rates and conditions.

Hard money loans are an alternative financing option for real estate investors looking to fund fixes, flips, and other projects. These short-term, asset-backed loans come from private lenders rather than banks and have less stringent qualification requirements than conventional mortgages. However, hard money lenders do have guidelines borrowers must meet to get approved. This guide will explain everything you need to know about hard money loan guidelines.

What are Hard Money Loans?

Hard money loans are short-term, high-interest loans issued by private lenders to fund real estate investments like rehabs, flips, renovations or new construction. The loans are secured by the property itself, meaning if the borrower defaults, the lender can foreclose and take ownership.

Hard money loans typically have a term of 1 year or less and carry higher interest rates than conventional mortgages, often between 8-15%. The benefit is quick and easy funding based on the property’s value rather than the borrower’s creditworthiness.

These non-traditional loans fill a need for real estate investors who may not qualify for standard financing but need capital to fund projects The quick turnaround also makes hard money a good fit for time-sensitive deals.

Hard Money Loan Guidelines and Requirements

While easier to obtain than bank financing, hard money lenders do have requirements and guidelines borrowers must meet. Key criteria include

Loan-to-Value Ratio (LTV) – The loan amount compared to the property’s appraised value Hard money LTVs often fall between 60-75%

Down Payment – Borrowers must contribute a down payment, often 25-40% of the purchase price or project costs.

Interest Rate – Usually 8-15%, set by the lender based on the deal specifics. Rates for riskier projects tend to be higher.

Origination Fee – Lenders charge an upfront fee, typically 2-5% of the loan amount. This covers processing costs.

Term Length – Hard money loans typically have terms of 6 months to 3 years. Shorter terms for bridge loans, longer for rehabs.

Payment Schedule – May be interest-only, interest reserves, or fully amortizing payments. Interest-only is common for short flips.

Collateral Type – Most hard money loans use the financed property as collateral. Some lenders may accept additional collateral.

Recourse vs Non-Recourse – Recourse means the borrower remains liable for the debt if the sale proceeds don’t cover the loan. Non-recourse limits this liability.

Experience – Many lenders require 2-5 years of real estate investing experience.

Exit Strategy – Borrower must provide a viable plan for repaying the loan at maturity.

Personal Financials – Lenders often ask for bank statements, tax returns, profit/loss statements and other docs to verify your ability to meet payments.

Credit Checks – Light credit checks may be part of qualifying. Poor personal credit can be overcome with good real estate experience.

Types of Hard Money Loans

Hard money loans come in a variety of types tailored to specific real estate investment scenarios:

Rehab Loans – For financing property renovations and repairs.

Bridge Loans – Short term loans to purchase a new property before selling the old one.

New Construction Loans – For building a new home or other building.

Mixed-Use Loans – For properties with both commercial and residential spaces.

Vacant Land Loans – Loans to purchase and hold or develop land.

Commercial Loans – For office buildings, retail space, industrial and other commercial real estate.

The guidelines vary between these types of hard money loans based on factors like project complexity, risk, and duration.

Steps to Getting a Hard Money Loan

If you need a hard money loan for your next real estate project, follow these key steps:

Pick your project – Hard money works best with flips, renovations, or new construction. Create a thorough business plan.
Find a lender – Research hard money lenders online and in your local area. Get multiple quotes.
Complete your application – Provide all required financials and property information upfront for the best chance of approval.
Get an offer – If approved, the lender will issue a formal loan offer outlining terms, fees, requirements, etc.
Accept the offer – If the offer meets your needs, formally accept it. Decline otherwise.
Close on the loan – Finalize all paperwork, pay fees, and deposit loan proceeds per the closing instructions.

Following these steps and meeting the lender’s requirements will give you the best shot at securing hard money financing quickly and easily.

Tips for Getting Approved for a Hard Money Loan

Since hard money lenders take on more risk, borrowers should avoid rookie mistakes and put their best foot forward during the application process. Here are some tips:

Pick the right project – Opt for tried and true flips or renovations rather than speculative ventures. Go with a property type you have experience with.
Have a solid business plan – Show lenders the profit potential with detailed rehab budgets, ARV calculations, and a well-researched exit strategy.
Put skin in the game – Come to the table with an adequate down payment, ideally 25-35% of the purchase price or total project costs.
Know your numbers – Run the calculations to show positive ROI. Reasonable projections boost lender confidence.
Highlight experience – Tout your real estate investing experience, comparable deals completed, contractor relationships, etc.
Get your documents in order – Have bank statements, tax returns, credit reports, profit and loss statements, and other paperwork ready to go.
Be transparent – Clearly explain the project, plans, risks and your abilities. Don’t try to downplay negatives.

Following these tips sets you up for success in both getting approved as well as executing on the project itself.

Common Reasons for Hard Money Loan Denial

On the flip side (no pun intended), there are scenarios that can quickly tank your chances for hard money loan approval:

Inexperienced borrower with no real estate investing track record
No down payment or insufficient skin in the game
No viable exit strategy for repayment
Property in poor condition or undesirable location
Poor profit potential – negative ROI
Misleading or overly optimistic projections
Weak contractor relationships and rehab plans
Shaky personal finances – low income, heavy debts
Previous bankruptcy or foreclosure
Lack of transparency about project risks

Avoiding these red flags gives you a leg up when seeking hard money financing. Be honest about weaknesses in your application and have plans to overcome them.

Hard Money Loan Guidelines: The Bottom Line

Hard money fills an important niche, providing access to capital for real estate investors who don’t meet conventional lending standards. But these non-bank loans still come with guidelines and requirements around collateral, down payments, business plans and experience.

Do your homework upfront, run the numbers conservatively, highlight your skills, and be transparent with lenders during the application process. Follow the loan guidelines, and a hard money loan can be a springboard to grow your real estate portfolio. With some discipline and smart planning, you can tap into this unique financing tool to fund your next profitable project.

What Exactly Is a Hard Money Loan?

Property is frequently used as collateral for hard money loans. Traditional banks, on the other hand, make choices based on factors such as:

Acquiring a standard bank loan may be time-consuming and laborious as the lender investigates an individual and their credit history.

The collateral is more critical with hard money loans. The lender seizes the property as payback for the debt if a borrower fails to make payments.

A hard money loan, often known as a short-term bridge loan, is a form of a loan secured by real estate. Individuals or private firms, not banks, are hard money lenders.

While hard money loans were initially seen to be a last-resort choice, they have risen in favor, and you may get a terrific bargain if you look around.

What Are Hard Money Loan Interest Rates?

Points might vary from 2% to 4% of the total loan amount. The costs charged by the lender for providing the loan are referred to as points on a hard money loan. The debt is represented by each point being a percentage point of the debt.

The top hard money lenders provide low lending rates, but if anything appears too good to be true, it most likely is. So ensure you work with a trustworthy lender before signing on the dotted line.

Interest rates typically vary from 6.375% to 18%, depending on the lender and the perceived risk of the loan.

Hard Money Lenders Explained – How To Properly Find & Utilize Them

FAQ

What are the terms of a hard money loan?

Hard money loan terms are usually short, typically lasting 1 – 3 years. This fast turnaround means lenders will profit quickly – either from interest on the loan or if you default on the loan. Let’s take a look at how higher interest rates come into play with hard money loans.

Is it difficult to get a hard money loan?

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.

What credit score do you need for a hard money loan?

Credit Criteria Usually, a minimum credit score of 550 or higher is required to qualify for a hard money loan. However, some lenders may be more lenient and even provide financing to borrowers with a score as low as 500.

How do payments on hard money loans work?

Unlike a traditional home mortgage, hard money lenders typically only charge interest on a monthly basis, which means you don’t actually pay any money toward the principal loan amount at each monthly payment cycle.

Do traditional lenders issue hard money loans?

Traditional lenders don’t issue hard money loans. You get them from individual investors or private companies. Borrowers may turn to hard money loans after a loan or mortgage application is denied or to avoid the lengthy process of getting approved for a loan through traditional methods.

What are hard money lending regulations?

Hard money lenders are subject to federal and state laws that bar them from lending to those who can’t repay the loan .However, unlike traditional mortgage lenders, hard money lending rules and regulations

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

How much down payment do you need for a hard money loan?

Being able to provide a portfolio of previous work may help your cause. Typically, hard money lenders require a down payment of 20% to 35%. Hard money loans come with higher interest rates and shorter terms than traditional mortgage loans. This can make them higher risk for some borrowers. • Rates: Interest rates can range from 8% to 15%.