There is an air of confusion about the criteria of a hard money loan, especially among the first-timers. They tend to mistake it with the conventional loan, which is a different deal altogether. For example, unlike a conventional loan, the credit score is not given much importance in this type of mortgage.

In order to make things more explicit, here is the list of requirements that are key to obtaining a hard money loan:

Share of equity

Chiefly, a hard money lender is interested in the total value of the property and the share of the equity of the borrower. Naturally, bigger equity means the minimum risk for the lender.

If you are serving a residential property as the collateral for the loan, then you must have a minimum equity of 25 to 30 percent. Similarly, the equity amounts to 30 to 40 percent for commercial properties.

Not all borrowers tend to have this much equity in their properties. The hard money lenders have a way out for them in the form of cross-collateralizing. It allows borrowers to use another property’s equity as the collateral.

Tax returns

As mentioned above, credit history is taken for granted in the process of a hard money loan. However, your tax returns will be thoroughly checked. A hard money lender, whether you are opting for hard money loans Houston tx or hard money loans in Virginia, will ask you to show up with the tax returns of the last two years.

It will give him an idea of your income. For example, if you are applying for a hefty amount but your tax returns refer to a modest income, then you are all set to return empty-handed. In other words, your loan proposal will only be accepted if it comes to terms with your income.

The resale value of the property

When it comes to getting a hard money loan, the resale value of your property must be good enough. Because in case you default on the loan, the lender will have to sell your property to get his money back. If a lender is in two minds whether or not your property will have a good resale value, he will reject the loan point-blank.

What’s more, the majority of the hard money lenders will demand a first lien position. Meaning, you will be conditioned to pay the amount of the lender first when the resale is done.

Experience counts

Although it is not a hardcore requirement. However, having experience does uplift the confidence of the hard money lender in the borrower. A hard money lender will always give priority to an experienced borrower over someone who is involving himself for the time in a fix and flip project.

Generally, the time has a huge say in fix and flip projects. A loan which is dragged for longer period of time does not end up with desired benefits. So some experience in the real estate always proves to be handy to avail a hard money loan, more so when the loan amount is an extravagant one.

Cash reserves

A hard money lender would like to know whether or not you have financial standing to meet the monthly payments. Not only that, but he would make sure that you have enough cash reserves to also take care of the holding costs, which include taxes, insurance, and other suchlike payments.

Without necessary cash reserves, it is tough to convince a hard money lender to sanction the loan. Regardless of a considerable share of equity, if a borrower is on the lower side of the cash, then the lender will feel insecure. In such a risky scenario, a hard money lender is mostly to decline the loan request.

Being organized

Being well-prepared is a must requirement. The hard money lender will have a good look at all the homework you have done to get the loan. In fact, it conveys your seriousness to the lender.

People don’t show the same level of consciousness to meet this requirement and, as a result, fail to impress their lenders. Being organized means, you have to be on top of your paperwork. While meeting with your hard money lender, you should carry LLG documents, purchase contract of the collateral property, and building plans.

They are must-have documents; unless you show up with these papers, the chances are minimal that a hard money lender will give a thumbs up to your loan request.

The last verdict

So, is your credit score hitting the rock bottom yet you badly want a loan? Well, turn to the hard money lenders. Irrespective of your financial background, like good or bad credit history, you can still be considered as a strong candidate for a hard money loan.

Given that, you must have considerable hard cash. Although, generally, hard money mortgages tend to be higher in terms of interest rate compared to traditional loans. 


Author Bio:

About Ashley Rosa: Ashley Rosa is a freelance writer and blogger. As writing is her passion that why she loves to write articles related to the latest trends in technology and sometimes on health-tech as well. She is crazy about chocolates. You can find her on Twitter: @ashrosa2.