What are the requirements for hard money loans?
There are a lot of property flips in America. In 2016, there were over 300,000 fix-and-flips, amounting to a $56 billion market. Whether a buyer is looking to purchase a fixer-upper or a newly renovated home, homeownership rates are high, at a rate of almost 65%. When buying a home, many Americans turn to traditional bank loans. Conventional bank loans can be more difficult than hard loans.
Traditional bank loans have strict requirements, while hard money loan requirements don’t require as much.
Why would you choose a hard money loan instead of a traditional one? What are the requirements for a hard money loan? Continue reading to learn more about how to obtain a hard cash loan and the requirements and rates.
What is a Hard Money Loan?
A hard money loan, also known as a short-term bridge loan or a short-term loan, is a loan secured by real estate. Hard money lenders are individuals or private companies, not banks.
Although they were once considered the last resort option, hard cash loans are now very popular and you can find great deals if your options are explored.
A property is often used as collateral for hard money loans. Traditional banks base their decisions on:
- The creditworthiness and ability to repay the loan
- The borrower’s financial history
- The ability of the borrower to repay
Traditional bank loans can be difficult to obtain because the lender needs to thoroughly investigate each applicant and review their credit history.
Hard money loans tend to be more concerned about collateral. Lenders can take the collateral if a borrower defaults on payments.
What is the average time it takes to get a hard money loan?
Many times, hard money loans are approved quickly and funds within days.
Hard money loans can be for 1 to 3 years. If you are looking to repay the loan quickly, hard money loans typically have higher interest rates.
Lots of property flippers use hard money loans because they plan to renovate and sell the real estate within a year, and they use that real estate as financing for the loan.
The high cost of a loan such as this is offset by the fact the borrower intends to repay the loan quickly.
How to get a hard money loan
Lender requirements for hard money loans vary depending on the lender. There is more scope for negotiation because hard money loans are often obtained from individuals or companies.
There are three main requirements for hard money loans.
A hard money loan can only be obtained if you have the down payment or equity required in the property that will serve as collateral.
For residential properties, the minimum amount is usually between 25% and 30%, and 30% to 40 for commercial properties.
Sometimes, a lender may allow a borrower multiple properties in order to obtain a single loan. The term for this is “cross-collateralizing.”
Borrowers with more equity or significant down payments have a greater chance of getting approved. Lenders are less likely to approve borrowers who have invested more in the property.
Financial strength overall
A common requirement for hard money loans is that the borrower have sufficient cash reserves to cover any monthly loan payments and holding costs. HOA fees, taxes, and insurance can all be considered holding costs.
A borrower’s cash reserves will determine how likely they are to be approved for a hard-money loan.
A borrower without sufficient cash reserves will often have difficulty getting a loan. There are cases when a lender will increase the loan amount and keep some of the borrower’s funds aside to pay for insurance and taxes.
In this case, the borrower will still get their loan but the lender will make sure that monthly payments are not neglected.
Real Estate Experience
Hard money lenders are interested in seeing the borrower’s experiences in the real estate market.
Borrowers trying to finance their first fixer-upper may have a harder time getting hard money loans than real estate veterans.
The lender may ask the borrower for details about the project and an exit strategy if they have no experience. They will want to know how the borrower intends to repay the loan.