It only takes a little to get your hard cash loan approved. A hard money lender is likely to approve a loan for hard money much faster than traditional banks. Many borrowers, including real-estate investors, need to obtain a refinance or purchase loan from traditional banks due to strict lending guidelines. Many borrowers need good credit or consistent income and the correct credit score. Hard money lenders are an essential part of the real estate finance industry.
Hard money loans that are most popular include the hard cash bridge loan and hard money fix loan. The purpose of the loan could be a hard-money purchase loan, hard-money refinances the loan, or hard-money cash-out refinance loan. These loans are often funded quickly, usually within 5 to 7 days. They rely on the collateral, a real estate asset that can be used to secure the loan, rather than the borrower’s credit or cash flow.
Here are the top five things you can do to get your hard-money loan approved. Keep in mind that this article does not cover owner-occupied hard money loans.
Loan to Value
A hard cash lender will consider the loan-to-value ratio when approving a hard-money loan request. It is commonly known as the “LTV Ratio”. The hard money lender must rely more on collateral to repay hard money loans because many borrowers who apply for hard money loans have poor credit and limited cash flow. It contrasts traditional banks, which will emphasise the borrower’s credit history and income to approve a loan request.
Calculating the loan-to-value ratio involves dividing the loan amount by property value. If the loan amount is $100,000, and the property’s value is $200,000, then the LTV ratio is 50% (100,000 / $200,000 = 50%).
It is vital to know the loan-to-value ratio because if the borrower fails to make the payments, the property will need to be sold, and proceeds from the sale will be used to repay the loan. The hard money lender could lose money if there are not enough proceeds from the sale to repay their loan. A substantial cushion between the property loan amount and its market value reduces the likelihood that the lender will lose money if the borrower defaults. Hard money lenders limit their loans to 70% of the property’s value.
Collateral
When approving loans, hard money lenders will also consider collateral (or real estate). Private money lenders are less dependent on the borrower’s credit and ability to repay, so they need to consider collateral types to ensure repayment.
A hard money loan is most commonly used to finance a single-family home or multi-family apartment. These property types are easy-to-value and account for most real estate sales. Other property types that hard money lenders might finance are industrial, commercial and retail, office, hotels, and other offices. These property types are riskier for hard money lenders, so LTV ratio caps are usually lower.
The land is the riskiest type of real estate a hard money lender can finance. The land is not a source of income, and its value depends on future uses. It makes it difficult for hard money lenders to finance. Borrowers looking to finance land will typically put down 50% of the purchase price, have strong credit and cash flow and have an exit strategy (described later in this article).
Credit
When considering a request for a hard-money loan, hard-money lenders will look at the borrower’s real estate collateral and LTV ratio. A hard money lender will likely request a credit report. They will check for late payments on revolving credit lines, defaults on loans, bankruptcy filings, outstanding judgments, and any other harmful items that could affect the loan’s repayment. Hard money lenders will only finance a loan if the borrower is likely to default on their payments.
Ability to pay
The ability of the borrower to pay the loan payment is essential, just like credit. Hard money lenders will only require income verification documents such as tax returns or W-2s. However, they will need to know how the borrower plans to pay the loan. The hard money lender might also request documentation to support the borrower’s explanation of how they plan to repay the loan.
Exit Strategy
A hard money lender will also consider the repayment of the loan when approving a private loan. Repayment of a hard-money loan is usually made through either the sale or refinance of the property. The hard money lender will need to know how the borrower plans to repay the loan.
The exit strategy will determine the common questions that a hard money lender might ask about the repayment. Hard money lenders might ask about the active listing agreement, estimated sale date, and improvements made to the property before the sale. Hard money lenders might ask about any existing refinances, credit enhancements, or cash flow enhancements that could make the borrower more appealing for traditional bank loans.
Conclusion – Hard Money Loan Approved
If borrowers know how hard money lenders approve loans, obtaining a private loan can be simple and fast. Borrowers should be ready to answer questions about the LTV ratio, collateral, credit, cash flow, ability to repay, and exit strategy. These items will improve a borrower’s chances of getting an approved hard money loan.
FAQ
What’s the difference between traditional bank loans and real estate investment loans (asset-based)?
Traditional banks have strict lending guidelines that make it challenging to obtain a loan for residential property purchases, rehabilitation, or resale. Asset-based lenders best serve these types of distressed properties. Asset-based loans can be short-term, have higher interest rates and close quickly. However, they can finance repairs and closing costs for properties within a 70% loan to value.
What is the term of the loan?
The loans are typically six-month to eighteen-month in length with built-in extensions. Each extension will require you to pay an additional fee.
Are there any upfront fees?
Accepting the committed terms requires payment of the Processing Fee and Valuation Fee. All other fees will be charged on the HUD and upon draw inspection.
How can I determine how much to pay for a property?
We recommend you pay at most 75% ARV minus any repairs. If you need assistance calculating this figure, please complete the quick application.
I have a question about the property I purchased. I need your help to determine if this is a good deal.
Yes. Please fill out the quick application on our website to submit an inquiry. During regular working hours, an associate will usually respond within two hours.
Do you have the funds to finance the repairs?
Yes, funds will be released if the asset’s value increases upon proper inspection.
