How To Improve Your Chances Of Qualifying For A Hard Money Loan
Hard money loan requirements usually differ from those of traditional bank loans. If you've never tried to get a loan from private money lenders, it may be unclear what you need to qualify for one. Moreover, you'd surely want to know how to improve your chances and obtain a hard money loan.
Hard money loans have fewer requirements than conventional loans. They are asset-based, which means the lender will focus primarily on the property's value. In particular, they're interested in the borrower's equity because the larger it is, the safer the loan is for the lender.
However, serious hard money lenders also pay attention to the borrower's financial strength because they want to be sure he can make regular monthly payments.
In this article, we've prepared a list of requirements you need to consider if you want to improve your chances of obtaining a hard money loan.
Down Payment and Equity
The most important thing lenders look at when approving your loan is the borrower's equity in the property or the down payment. It serves as collateral for the loan, and it ensures the lender that they will get their investment back in case the borrower doesn't repay the loan. The minimum equity is between 24 and 30 percent for most lenders. However, the minimum requirement increases to up to 40 percent for commercial assets. You will significantly improve your chances of getting a loan if you have a sizable down payment. The more money you invest in the property, the less risk the lender takes. Some lenders let you use multiple properties to secure a hard money loan. It's a process called cross-collateralizing.
Overall Financial Strength and Cash Reserves
The next requirement you need to secure is enough income or cash reserves to make monthly payments for the loan. The more cash the lender sees in your funds, the better your chances will be for loan approval. If you have no cash reserves, chances are you won’t get a hard money loan. However, in some cases, private lenders may decide to increase the loan amount and hold back some of the funds to cover the holding costs. Those costs exclude taxes in most cases and HOA payments, insurance, and other holding-related fees. That way, the borrower still obtains the loan, and the lender has insurance that the return funds cover all the base holding costs.
Rebalance your debts and income
You need to include your annual income in the loan application, and this includes income from part-time work, too. If your income doesn't seem sufficient to lenders, you may want to consider starting a side hustle or asking for a raise to increase your earnings.
Moreover, do whatever you can to rebalance your debts.
Selling liquid assets, like stocks, is usually a smart move. If you use the proceeds to cover high-interest consumer debts, you will get a much higher rate of return, according to financing experts.
Your debt-to-income ratio is of the essence for loan approval. The most efficient way to boost it is to increase your income and lower your debts. Although some lenders don't require a strict DTI, having a low ratio shows them that you have everything under control and can take on a new loan.
Real Estate Experience and an Exit Strategy
Hard money loans are usually structured for investors, so the lender will want to know about your real estate experience. An experienced investor who has been in the business for years will have far better chances of acquiring a hard money loan than a new investor looking to do his first house flip.
The lender will also want to know about the project details, especially if you're a new investor without sufficient real estate experience. They will want to know about your exit strategy and your plans for repaying the loan.
Bonus Tip: Don't Ask for Too Much Money
If you ask for more money than you need to meet your financial goal, the lender will see it as a risk factor. Distinguish a specific reason why you need a loan, tie a particular amount to it, and ask for that amount only.
Obtaining a larger personal loan will squeeze your budget and potentially impact your ability to tend to other crucial financial obligations. Many borrowers already have student loans and mortgages to repay when they ask for a hard money loan. Asking for too much may make you look reckless to the lender.
Find the Right Lender
As already said, not all hard money lenders operate the same way, nor do they have the exact loan requirements. Most online private lenders disclose their minimum requirements for loan approval, as well as their terms. It allows you to research multiple options and narrow them down to the ones that fit your budget and needs most.