Private lenders primarily focus on the profitability of the deal you are considering. They have to calculate the loan-to-value ratio to measure the risk. But traditional financial institutions look at your creditworthiness and the collateral.
Your hard money lender also wants to know your experience in a real estate flipping deal. But they are more concerned about the property itself. So, they carefully analyze the value of your real estate, the contractor, and the extent of rehab needed.
Here’s a review of what you need to qualify for hard money.
In most cases, a hard money lender loans about 60-80% of the value of your house. This requires you to buy something with instant equity. Or you should have money to put down. At closing in cash, you will need to put down 20-40% of the loan. That’s why you need to have access to cash if you want a hard money loan. Though there are some lenders that are willing to offer 100% of the value of the house in certain circumstances. These are called 100% LTV hard money loans.
Most private lenders only take the first lien position. In the event of default, the lender wants to be the first to recoup the liquidated proceeds. So you cannot use your house to obtain a second mortgage. If you are looking for a second home loan due to lack of equity, this loan is not for you.
The loan-to-value represents how much the debt is relative to the home value. If you are buying a $120,000 house and want a $90,000 home loan, the LTV is: 90k/120k = 75%.
Perhaps you don’t have a 30-40% down payment to buy a home. Your lender may decide to do a cross lien. They’ll basically put a lien on another of your property with equity. The lien will then act as the security for the loan you want to obtain.
Do private lenders give out hard money loans without collateral?
Without real estate as security, it will be hard to obtain a hard money loan. It is rare but you may obtain hard cash if you are proactive. In that case, you need a lender to pre-approve your application before the property is acquired. The application process should prove your ability to repay the loan when the property is bought.
Hard money loans are not meant for personal use. Without current real estate, you can only obtain the money on the prospect of acquiring a property in the future. The provider will ask you for:
- Tax returns
- Financial statements
- Retirement accounts
- Proof of cash savings
These details allow the provider to assess your credibility in coming up with cash. You should be able to cover the gap between the purchase price of the property and the loan value. This should be something between 50-70% of the present resale value of the piece of real estate.
If your application is approved, the lender gives you a letter of funds. However, this is not a guarantee that money will be availed to you when you find a good real estate deal. The final decision lies in the current value of the property, prevailing market conditions, and value of other properties in the neighborhood.
Do you have a poor credit score? Are you self-employed and don’t like documenting your income? You could use hard money loans for investing. Take out a loan for flip or rehab. Or use it to for a construction project.
It would be easier for you to deal with a hard money lender than a traditional mortgage provider. This is especially true if you have other investment properties.