Hard Money Loan Qualifications: Everything You Need to Know

Hard money loans are a popular financing option for real estate investors and developers. But qualifying for one is different than getting a traditional mortgage So what are the key requirements and qualifications to get approved?

In this comprehensive guide, we’ll cover all the core criteria lenders look for when considering a hard money loan application. Understanding these ahead of time allows you to put your best foot forward and improve the chances of securing the funding you need.

What is a Hard Money Loan?

First, a quick primer on what hard money loans entail Hard money loans are provided by private lenders rather than banks or mortgage companies. The loans are asset-based, meaning the real estate project itself backs the loan rather than the borrower’s creditworthiness

Hard money loans come with higher interest rates but provide faster approvals and easier qualifications than conventional financing. They are commonly used for:

• Fix and flip projects
• Real estate development
• Bridge financing
• Purchasing distressed properties
• Funding repairs or renovations

With traditional lenders tighter on lending criteria, hard money fills an important niche. Now let’s look at what it takes to get approved.

Hard Money Loan Qualification Criteria

Hard money lenders have more flexibility than banks in their approval decisions. But you still need to meet certain criteria for them to feel comfortable issuing a loan. Here are the key qualifications lenders look for:

Sufficient Equity in the Property

• Hard money loans rely on the real estate as collateral should the loan default. So equity is critical.
• Lenders want to see at least 25%-40% equity in the property depending on market risk. More equity lowers their risk exposure.
• Equity is calculated as: (After Repair Value x Percentage) – Purchase Price – Repair Costs.
• Multiple properties can potentially be used as collateral through cross-collateralization.

Experience With Real Estate Investing

• Lenders prefer borrowers who have successfully completed similar projects before.
• New investors may need to provide more detailed plans to show their capability.
• Having industry knowledge and demonstrated success gives lenders confidence.

Solid Exit Strategy

• A realistic plan for repaying the loan at maturity is essential.
• For fix and flips, show how you will sell for a profit within the loan term.
• For rentals and developments, present longer-term financing options you can transition to.

Sufficient Reserves

• Lenders want to see you have cash reserves to cover costs like:
  • Loan payments
  • Property taxes
  • Insurance
  • Other holding costs
• Reserves give assurance that payments won’t be missed. Typically 3-6 months of reserves is sufficient.

Good Personal Credit Score

• While credit scores are less important, most lenders still check them.
• A minimum score of around 600 is often required, though some may accept lower.
• Good personal credit provides additional confidence you will handle the loan responsibly.

Additional Qualifying Factors

Beyond the core criteria above, a few other elements come into play when a lender reviews your application:

• Loan purpose – The intended use of funds can impact qualifying. Purchase loans often need less equity than construction loans.

• Documentation – Lenders will want to verify income, assets, property appraisal or ARV, and other details through documentation.

• Property type – More risky property types like land or commercial projects often have higher equity requirements.

• Market conditions – In a slower real estate market, lenders may tighten equity and qualifying requirements.

• Investment entity – Most lenders require the loan be taken in an LLC name rather than personal name.

• ** repaired home repair values** – Higher ARVs allow the property to better support the loan. ARVs under $100K can be more difficult to get approved for.

How to Improve Your Chances of Approval

If your qualifications are borderline, there are steps you can take to strengthen your loan application:

• Increase your down payment – More equity lowers lender risk. Put down 30% or more if possible.

• Have a co-signer – A financially strong co-signer can help offset any shortcomings you have.

• Start with a smaller loan – Asking for too much with limited experience may get denied. Build up over time.

• Provide detailed plans – Present thorough project plans, budgets, contractor estimates, and ARV calculations.

• Show strong reserves – Highlight substantial cash reserves to handle costs beyond the loan.

• Get a business partner – Having an experienced partner provides expertise you may lack.

While hard money has more flexible requirements than traditional lending, it isn’t free money. Do your diligence to put together the strongest application possible. That will get you the financing you need.

Common Hard Money Loan Standards

To recap, here are typical hard money loan standards you should anticipate:

• 25-40% equity in the property
• 600+ personal credit score
• 3-12 months reserves depending on project complexity
• Forced appreciation based on solid ARV assumptions
• Detailed project budget and timeline
• Realistic exit strategy to repay loan
• Investment made through LLC entity
• No recent bankruptcies or foreclosures

As long as you can check most of those boxes, have confidence going into the process.

Questions to Ask Potential Lenders

Vetting lenders is an important part of the process. Here are key questions to ask when interviewing hard money lenders:

• What are your specific loan qualification standards?
• How long does the approval process take?
• What information and documents do you require?
• Do you lend for new investors or only seasoned ones?
• How involved will you be after funding the loan?
• What will cause you to decline a loan?
• Can you provide references from past borrowers?

Their responses will help determine if they are the right fit for your particular situation. Find a lender ready to give you a fair shot.

Avoid Potential Pitfalls

While hard money loans are easier to qualify for, you still need to avoid some key mistakes:

• Undervaluing repairs – Repair budgets that are too low cause cost overruns that put the loan at risk. Be conservative.
• Overestimating ARV – An ARV detached from reality will get your loan denied. Verify your assumptions.
• Lack of exit plan – Having no viable strategy to repay the loan is a red flag for lenders.
• Poor documentation – Incomplete or sloppy documents undermine your professionalism.
• Too much leverage – Asking for excessive loan amounts compared to equity raises concerns.

Do your homework to avoid these missteps. Put your best foot forward throughout the process.

Work With a Reputable Hard Money Lender

A major factor in getting approved will be choosing an established lender known for working with borrowers to find solutions. They should be able to walk you through what qualifications you need. The top hard money lenders want you to succeed!

With a solid understanding of hard money loan qualification criteria, you can determine if this type of financing aligns with your investment goals. Weigh both the benefits and requirements as you make an informed decision. And approach the process knowing exactly what lenders will be looking for. Do that, and your chances of securing the loan you need go way up.