How Do I Qualify For A Hard Money Loan?
Nearly anyone can be a real estate investor. What separates the tire kickers from the successful entrepreneurs is that you’ve figured out how to finance your projects. The only thing stopping potential borrowers who are looking to move forward on a project is having the right financing in place. Once the project is confirmed; whether it’s a fix and flip, a new construction, or anything else, the next step is for you to find the right financing to go along with it.
As a lender at Carolina Hard Money, I explain the qualifications required to borrow hard money at least 15 times a day. I’ve worked with investors from all walks of life who are also looking to qualify for financing. You want that financial freedom for your family, upgrade your current lifestyle, or maybe you are looking to leave a legacy.
If you would like to explore more about your goals as an investor, join me for personalized free mentorship.
In order to know what you would qualify for, you need to know what it is you are truly searching for. There are two types of lenders: asset only based lenders and lenders that also care about your ability to pay back the loan. By the end of this article, you will know whether or not you would be a better candidate for a borrower based lender or an asset-based lender.
Two Types Of Lenders: Asset-Based And Borrower-Based
No matter what, all lenders ask one important question whenever to do a loan or not: How quickly can I sell this property in the event that I need it back?
Now you might be wondering why anyone would do a loan if they thought they would have to take it back to begin with.
Lenders understand that 99.9% of all borrowers have every intention of paying the loan off and becoming successful with the project that they are working on. Unfortunately, bad things happen to good-intentioned people all the time. When that happens the lender must take on the possibility of this risk every time they lend money.
All Hard Money Lenders Are Not Asset Only-Based
Back in the day, or shall I say pre-2008, most hard money or private money lenders only cared about the collateral being used to borrow money against. They looked at every project from the lens of how well it would fit into their current portfolio of real estate investments. They weren’t really lending money, they were just using their borrowers to find properties for their own investments.
When the mortgage industry collapsed in 2008, Wall Street investors discovered a different option for earnings in the mortgage business. They discovered the value of the short-term lending business. They had a greater interest in the repayment of loans rather than collecting houses for a portfolio.
As short term lending continued to grow in popularity, these banker investors brought with them similar guidelines to those of mortgage lenders to qualify their short term borrowers.
Since that time we have seen interest rates for hard money loans drop from five points and 18% interest down to a much more reasonable 1 to 3 points And 8 to 12% interest.
What Is The Difference Between A Borrower Based Hard Money Lender And An Asset-Based Hard Money Lender?
A borrower-based lender not only cares about the ability of the borrower to repay the loan but also about the project that the borrower is working on. Remember every lender wants to know how long it will take to sell the property when we have to take that house back.
Borrower based lenders care a lot about the real estate investor experience of the borrower , the credit score, or credit history. They care about a background check for potential fraud. They want to make sure that this person follows the rules of the lender and can be trusted to pay the loan back. In addition, they care about how much cash you have in the bank, your ability to save money, and your ability to pay it back.
When an investor tells a lender that they have plenty of lines of credit and credit cards that they can fall back on, that doesn’t make lenders feel any better. Because when you go deeper into credit debt, your credit scores drop and it hurts your ability to get refinanced out of the project.
An asset-based lender is going to care mostly about the project itself. They will be concerned about the location of the project and how well it will fit into their portfolio.
What Are The Top Requirements Needed To Qualify For A Borrower-Based Hard Money Loan?
Of course, all lenders are a little different and what’s required to qualify someone for a hard money loan. Below you’ll find a list of what most borrower-based lenders will ask for. Most every borrower based lender will want to know your experience as a borrower, and your credit score and background check.
Experience is important because the lender wants to make sure the borrower not only knows how to successfully complete the project but also understands that unexpected problems will occur that they must be prepared.
Credit and background checks are important to the lender because they want to make sure that you have the ability to get refinanced out of the loan just in case they can’t sell it.
If you have the ability to save money in the bank, that also gives the lender a sense of relief knowing that the borrower is responsible with their funds. In addition, they would have the resources to take care of unexpected issues.
Requirements For A Borrower-Based Hard Money Loan
- Full-time/part-time investor
- Credit history/credit score
- Background check/fraud
- Cash in the bank
- Available credit
- Work history/income
- Tax returns/ w-2
- Entity information. ie LLC, partnership etc
- Personal guarantee
Most borrower-based lenders will take all of these things into account at some level. For instance, if your credit score is 10-20 points below their guidelines of 650 they may overlook that if you have $50,000 in the bank. Use this list as a guide because every lender is different.
What Are The Top Requirements Needed To Qualify For An Asset-Based Hard Money Loan?
Asset-based lenders are not all alike. Some of these lenders will care more about how much equity the borrower has in the property. In other words, they like being lenders, but if you don’t pay they are well prepared for it. They tend to lend a very low loan to value. 55% of the after repair value and below is not uncommon for these lenders.
An asset-based lender really cares about the size and quality of the project. They are also interested in your experience as an investor and that type of project. The last thing they want to do is go in to repair it correctly after they’ve had to take it back from you.
Requirements For Asset-Based Hard Money Loan
- Style of project
- Type of project
- Uniqueness of project
- Borrower equity
Location has always been a top priority for anyone investing in real estate. Is it on a busy road? Is it in a nice neighborhood? Does it look like all of the other houses around it? These are all important factors when building a portfolio.
The size and the type of the project are important to each individual lender. Asset lenders have a certain niche of projects they will add to their portfolio and projects they are not interested in.
Asset lenders are also looking at projects with an exit strategy in mind. They want to make sure every particular project is the right type of home, the right style of home, and is in demand. They never want to have the largest house in the area or the most unique house in an area because it limits future buyers.
Finally, an asset-based lender cares about the equity that any you will have in a project. This accomplishes two things. It is less likely that you’ll walk away from a deal if you have a lot of money wrapped up in it and if we have to take it back tomorrow then we have a lot of equity in the deal.
What If I Don’t Meet The Requirements To Qualify For A Hard Money Loan?
If you are trying to qualify for an asset-only based loan and your project fails to meet the guidelines, then move onto another project. What many borrowers don’t understand is that guidelines that are put into place for lenders are also there to help the borrower. If the lender doesn’t like the risk, the borrower shouldn’t either.
There are a number of reasons that you may not qualify for a loan from a borrower-based lender. Maybe your credit score is a little low or you have past foreclosures or bankruptcies that could hinder your ability to borrow. Each of these items can be addressed through a credit repair company.
If you are not qualifying because of experience or lack of money in the bank, you may want to consider bringing on a partner that has more experience, better credit, and or cash in the bank. Even though you’d be splitting the investment and returns, you’d still be able to build your portfolio as a borrower. Just make sure that it is someone that you know, like and trust.
How Do I Apply And Qualify For A Hard Money Loan?
What are the next steps once you feel like you will qualify for a hard money loan?
The first step to qualify for a loan is to fill out this application link. This will allow us to get to you and for you to get to know us. We can look at the whole picture and evaluate the best direction to put you on the path to success.
Once you have filled up the application, we will then send you a link where you can upload the required documents so we can check and assess everything.
We only lend to entities although we do underwrite based on the individual’s ability to pay back the loan. We also allow borrowers to use their self-directed IRA as the borrower.
At Carolina Hard Money we are looking for preferably an experienced borrower, but we will take other factors into consideration. We like to see the borrower have at least a 650 middle credit score enabling their ability to refinance easily. You will also need to have enough money in the bank to bring to the closing table, get the contractor started, and pay at least six months worth of payments.
If you would like to learn more check out this link to the top 80% of questions asked of Lenders.