What are the requirements of a hard money loan?

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There needs to be more clarity about the criteria of a hard money loan, especially among first-timers. They tend to mistake it for a conventional loan, a different deal altogether. For example, unlike a traditional loan, the credit score is not important in this type of mortgage.

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

Share of equity

A hard money lender is primarily interested in the total value of the property and the borrower's share of equity. Naturally, bigger equity means the minimum risk for the lender.

If you are serving a residential property as the collateral for the loan, 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. Hard money lenders have a way out for them through cross-collateralizing, which allows borrowers to use another property’s equity as collateral.

Tax returns

As mentioned above, credit history is taken for granted in a hard money loan process. However, your tax returns will be thoroughly checked. A hard money lender, whether you are opting for hard money loans in 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, 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. If you default on the loan, the lender must sell your property to get his money back. If a lender is in two minds about whether or not your property will have a good resale value, he will reject the loan point-blank.

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

Experience counts

Although it is not a hardcore requirement, 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, time has a huge say in fix-and-flip projects. A loan that is dragged for a longer period of time does not end up with the desired benefits. So, some experience in real estate always proves handy when availing of a hard money loan, more so when the loan amount is extravagant.

Cash reserves

A hard money lender would like to know whether you have the financial standing to meet the monthly payments. He would also make sure that you have enough cash reserves to cover the holding costs, which include taxes, insurance, and other similar payments.

With necessary cash reserves, convincing a hard money lender to sanction the loan is easy. 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 mostly declines 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 being on top of your paperwork. While meeting with your hard money lender, you should carry LLG documents, the 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 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 a strong candidate for a hard money loan.

Given that, you must have considerable hard cash. However, hard money mortgages tend to be higher in interest rates than traditional loans.