Hard Money Loans for Investors

Hard Money Loan Qualifications.

Many times investors ask me to send them information on a hard money loan. As a mortgage broker with many programs and options it is hard to tell them exactly what the qualifications are for financing their project. They are many because hard money lenders are private investors. Each private investor makes up their own guidelines. Unlike conventional financing there is no secondary market and there are no quasi government organizations like Fannie Mae or Freddie Mac that establish uniform or conventional guidelines. There are qualifications that each bridge and real estate rehab lender have in common. They are:

1. The property and after rehab value.
2. The exit strategy.
3. The down payment.
4. The investors experience.
5. The investors credit.
6. The investors cash reserves.

The Property.

There was a time and will be again were the property and the after rehab value of the property was the sole consideration of doing a short term loan to a real estate investor. Whether the deal is commercial or residential investment property this remains the most important key to the deal. The reasons it is not the only criteria is that lenders have been burned by the declining value of properties and the excess of properties available. This means that if they have to take the collateral for the short term loan the property has been harder to sell and they get less money for it. Yet the collateral still remains the most important criteria. The lower the loan to value the better the deal. Even though some lenders will go as high as 65 to 70% of the after rehab value those deals are tough when so many are available at or below 50%.

The Exit Strategy.

Almost of equal importance to the collateral to many purchase rehab lenders require a solid verifiable exit strategy. This means if you say you are going to sell it you should have a buyer who is pre-approved and their information needs to be verifiable by the lender. If you say you want to refinance the property then you need to have the income, credit and assets to qualify for a conventional refinance loan. Whatever your exit strategy is it must be verifiable by the lender. This is good for the lender and for you. No one wants to get stuck with a non performing asset.

Down Payment.

Though there are programs that do not require down payment they are fewer than ever. Most purchase rehab lenders require a down payment. For this reason it is good to be prepared to invest 20% to 30% in your projects. Because there are so many projects available yet funds are limited a down payment makes your project easier to fund. Also if you have poor credit assets help.

The Investor.

The credit, assets and experience of the investor plays a role in the qualification process. For a real estate investor qualify the should have good credit, assets and experience. If they do not and are short in any of these areas they need to be stronger in others. Meaning they should have a deal with lower than 50% loan to value, a strong exit strategy and or a down payment. Because each private investor has different criteria, it is hard to say one deal will qualify and another would not based on one criteria or another. But, the first three are the most important. Most deals that the real estate investor has that requires funding will qualify based solely on the after rehab value of the property, the exit strategy and the down payment. Even though there are no down payment deals available you need to be a strong investor to qualify for them.

Hard Money Loans.

The reason real estate investors choose to use hard money loans is that they are a source to purchase and rehab property to make a substantial profit that they may not have without the use of this expensive money. These short term loans are expensive and even if they were legal for a home owner to borrow from the private lenders offering these loans it would never be advisable. So how hard are these private loans you should ask? The answer is threefold. They are restrictive in loan to value, they are high in rate and high in fees.

Restrictive in Loan to Value.

The maximum loan to value for many hard money loans range from 50% to 70%. No deals are done at the higher loan to value for two reasons. First the hard money lender requires lots of equity in case of default they can list and sell the property quickly because they will in theory be below market value. The reason I say in theory is because there are so many REO’s, Short Sales and foreclosure properties on the market today that what was normally considered an exceptional deal is common place. For that reason The private lenders are more particular about the properties and loans they choose to fund.

Secondly, any real estate investment that has less than 30% equity are not good investments for the investors unless they are purchasing the property for the cash flow. In that case they are long term investments and not suitable for the short term nature of these expensive bridge loans.

High Interest Rates.

Whether you are an investor buying and or rehabbing commercial or residential investor properties the rates are substantially higher than they would be for conventional commercial or residential lending. The rates are higher because the risks are higher. The risks are higher because these loans are not underwritten based on the standard conventional guidelines and there is a very limited or no secondary market for private bridge loans. This is generally not an issue because the borrowers know these are only short term loans. The terms range typically from 3 to 24 months. Therefore, the higher interest rate is of minimum importance because both lenders and borrowers know that the borrowers have an exit strategy to quickly payoff these high interest rate loans. Many lenders require a viable exit strategy before they make the loans.

Higher Points.

Because these loans are short term in nature the hard money lenders always charge discount points. They typically charge 4 to 6 discount points. In addition the private money brokers will charge 2 to 5 points. So on average a borrower is paying 8 to 10 points. Plus closing costs. These are high fees. They only make sense when an real estate investor will make substantially more money and they have no other way to fund the deals.

Why Use Hard Money Lenders.

Simply to make money. As a real estate investor you have choices in financing your deals. You can choose conventional financing that requires at 30% to 35% down payment for properties that are in good shape. There are many other conventional requirements including credit, cash reserves and the current value of the property versus the after rehab value of the property. These all make conventional financing almost impossible.

The other option is to use your own funds and not finance a deal at all. But, most astute real estate investors know that if they can make a net profit of $25,000, $50,000, $100,000 or more using a hard money loan they do not like the fees but they we pay them versus not making any money because of lack of financing.

Hard Money Loans for Real Estate Investors

Hard Money loans are a great way for real estate investors to take advantage of a market where there is an abundance of opportunities for them. Short sales, Foreclosures, REO’s, Rehab commercial and residential investment properties are available for never before seen deep discounts. As a real estate investor now is the time to be in the game and buy as much as you can. But there is a misconception that even though hard money lenders are focused on the collateral that they will do any loan regardless of credit, income,or character.

Collateral is King.

Yes, the main determining factor is not credit, verifiable income, or assets like in a conventional loan. For hard money lenders the Collateral is king. This means that if the collateral is good then there is a good chance for them to do the deal. The misconception is that the collateral is the only thing. No they are not credit score driven, but if you submit a credit report that shows you do not pay anyone the hard money lenders are likely to pass. No they are not income drive. But if you show no ability or history to repay a loan they are likely to pass. If you have no assets, no verifiable income and terrible credit, Hard Money Lenders will still pass on the deal even if the collateral is good with a low loan to value.

Other Factors in Qualifying for a Hard Money Loan.

Because these are private investors they are not blind and they all set their own criteria. The key is that they are comfortable that the borrower will do what they say they will doe (like rehab the home in 30 to 60 days) and pay them back. Therefore a positive track record as a real estate investor and or a good team including Realtor, contractor and loan consultant are all important to them. It is also of utmost important to have a viable exit strategy. It is not good enough to say you will refinance the property if by looking at your credit profile you will not qualify for a refinance loan. Likewise it is not good enough to say you will sell the property if you do not have pre-approved buyers (more than one) waiting to purchase the property.

Hard Money Loans Guidelines.

So we know that the collateral is king and the borrower does not have to meet conventional guidelines to qualify, but there the bridge money investors look at a complete profile and it is important for we are pretty sure you will qualify before you or I invest a lot of time and energy in submitting a deal that has no merit.

Another Misconception About Hard Money Loans.

Some people believe hard money lenders ultimately want you to fail so they can get the property. Truthfully that is not why they are in the business. Just like banks do not want to own REO’s private investors who make bridge loans do not want to own your properties. The reason the offer such low loan to values is if they do need to get involved they can sell them quickly to replenish their funds and do what they do, lend money.

So do not be misled. You must be able to deliver what you said and show that you can quickly take the private lender out of the transaction if you want to take advantage of the market to day using hard money loans. I can help you package your deals so you could qualify.