Qualifications to buy a house with hard money
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Sometimes it is difficult for investors to get traditional loans for real estate investment, maybe because of their credit standing, time constraints or the type of property they want to buy. In these instances, a hard money loan becomes a viable option to go with. Hard money loans are short-term loans that are mostly funded by private companies or investors based on the asset that the borrower wants to invest in.
This credit facility is typically made available for players in the real estate space, house flippers, or people who trade in competitive markets. Although these loans are easier to get than traditional mortgages, there are still criteria for qualification. This article, therefore, shares pertinent hard money information and explores the basic qualifications needed to qualify for these loans. Additionally, we will share tips on what lenders look out for when assessing prospects who apply for these loans, so stay with us.
What is a hard money loan?
Before we go fully into the criteria for qualification, it is important that you fully understand what this credit facility is all about.
Hard money loans are unconventional loans that are given on a short-term basis with real estate as collateral. The primary purpose of this facility is usually investment in real estate. This includes the purchase of rental properties, house flipping, or commercial property projects. Unlike traditional mortgages or loans, where the creditworthiness of the borrower is a major factor for qualification, this option focuses solely on the worth of the property that is being invested in, which is also most often used as collateral.
Key features of this option include the following:
- Short duration for repayment, often between 6 months and 3 years.
- Higher interest rates ranging from 8 to 15% or more.
- Approval period is often within days.
- Minimal Paperwork
Why choose hard money?
The following are instances where a hard money loan is a very attractive option:
- An investor needs to close a property deal fast
- The property is dilapidated
- The buyer does not have good credit scores or a stable income
- The borrower could not get a traditional loan
- Stiff competition in the market requires fast cash flow
Although this option is very convenient, it is not the best option for everyone. Due to the fact that the lender faces a higher level of risk in this transaction, the cost of borrowing is higher and that is also why qualification is important, even if it is not as stringent as traditional mortgages. You can click here for details on qualifications for government-assisted mortgages.
Core qualifications to buy a house with hard money
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The following are the major criteria to qualify for a hard money loan:-
1. Equity or down payment
Having a significant amount for a down payment or in equity is one of the most important criteria for qualification. Lenders of this option typically require that the borrower has between 25 to 40% down payment based on the LTV ( Loan-to-Value) ratio that they are willing to accept. In most instances, the highest LTV considered is between 65 and 75%.
The reason for this requirement is that it lowers the risk for the lender and ensures that the borrower is fully invested in the property.
2. Collateral (property value and type)
The property that the loan will be used to purchase is usually a primary consideration and the following are factors that will determine approval:
- A fixer-upper; this is a property that has a high after-repair value.
- Current market value of the property
- Present condition of the building/house
- Location – This affects the potential for appreciation
- Type of building
From the above, we can already deduce that hard money lenders prefer properties that are most likely to resell faster, have higher rental or appreciation potential.
You can visit this site: https://www.grandmashousediy.com/ for DIY tips for fixer-uppers.
3. Exit strategy
This refers to the strategies that the borrower has in place for repaying the loan. Find below some of the most used strategies:-
- House flipping
- Refinancing (mostly with a conventional mortgage)
- Leveraging rental income as a qualification for a long-term credit facility
The clearer a borrower’s exit strategy is, the higher their chances of approval.
4. Experience in real estate investment (optional but helpful)
While this is not a must-have criterion, experienced investors in real estate or house flippers are more likely to get approved for this credit facility because they have demonstrated an ability to turn around their capital and make a profit.
5. Credit score (less important, but still considered)
Although a high credit score is not a top priority, some lenders still check for it. People with low credit scores are more likely to get or require the following:-
- Higher interest rates
- A guarantor or co-borrower
- Extra Paperwork
- Lower LTV
Other factors that can improve the chances of an applicant with bad credit is a show of financial responsibility.
6. Ability to cover holding costs and renovation budget
Applicants need to show that they can handle the following:
- Payment of monthly interest
- Property taxes and insurance
- Costs of repair and renovations
- Maintenance and utility bills
Some lenders may help with some of the cost of renovation if you provide a convincing and detailed budget and work timeline and scope.
How the hard money loan process works
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The following is a summary of the process for hard money loans:
- Initial consultation and inquiry
- Pre-approval
- Due diligence
- Loan offer
- Closing
The specifics of these steps may differ from one lender to the other, but these steps sum up the hard money loan process.
Tips for getting approved for a hard money loan
Before we round up this article, find below some quick tips that will help you get approved for a hard money loan:
- Have a clear plan of investment which includes budget, timeline and comps
- Find out what the lender requires before putting in your application
- Have the required down payment on hand
- Make sure you respond as soon as due and in a professional manner during the underwriting stage
- Start out small to build your creditworthiness so that you can get higher amounts.
Conclusion
While hard money loans are a great alternative to conventional mortgages or credit facilities, it is not for everyone. You need to do your due diligence to find out whether this is really the way to go.
We believe that this piece has shed some light to help you start out on your due diligence in determining the best option of financing for your real estate investment.