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What are the requirements to qualify for a Hard Money Loan?

The requirements to qualify for Hard Money Loans vary widely. From location to location, Borrower to Borrower, and property type to property type, the criteria for each unique Loan Program will differ, sometimes even on a case by case, neighborhood by neighborhood, day to day basis.

One thing is certain: a Private Hard Money Loan is going to be easier to qualify for than typical bank financing, and since it’s asset-backed (secured by equity in the property), it will also be the most flexible type of debt financing you can find.

While it’s impossible to say the exact criteria to qualify for your specific Hard Money Loan scenario, we do have 7 Qualifying Criteria™ that are the standard factors we at Glassridge consider when Pre-Qualifying a prospective Hard Money Loan.

The 7 Qualifying Criteria™ For Hard Money Loans

1.) The Deal Itself.

At the foundation of almost all our FAQs, tutorials, applications, and loan programs is The Deal Itself. It’s so important that we consider it a proper noun.

As a Lender, we want to see that your deal is actually going to be profitable (so that you’ll be able to pay back the loan!).

Are your numbers accurate?

Are your projections realistic?

Is your deal hot?

Whether it’s a Single Family Fix & Flip, an Apartment Building Buy & Hold, or a Commercial Construction Project, the bottom line of everything always comes down to the numbers.

Your deal is unfundable if it’s too much high-risk, low-reward, pie in the sky, wishful thinking. The Deal Itself is what secures the loan, so this factor is non-negotiable & ultimately the most important Qualifying Criteria.

The good news is, The Deal Itself is rarely a reason for rejection. Even if you’re a beginner just starting out, you can probably identify a deal that we’d be willing to finance. Now you just have to worry about the next 6 Qualifying Criteria.

2.) Down Payment & Closing Costs.

If you’ve read our Answer to “What are the most common reasons Hard Money Loan Applications get denied?” you’ll know that, by far, the number one reason Hard Money Borrowers get denied is:

Lack of Liquid Cash on Hand.

For a new acquisition, most Hard Money Loans will require you to cover, in ‘cash’ out of pocket:

  • about 20% – 40% of the Purchase Price (borrowing at a 60% – 80% LTV),
  • 3% – 6% of the total loan balance in closing costs & fees, and
  • probably some portion of the rehab costs (which will be reimbursed in draws after the work is completed).

Even refinances will require 4% – 10% of the total loan amount paid at closing to cover expenses like the Origination Fee and Closing Costs, though in some rare cases, exceptions can be made where these fees are paid out of the actual loan amount at closing.

If Lack of Liquid Cash on Hand is a problem you’re facing, it might be frustrating, but you’re not alone. This is by far the most common reason Borrowers get denied, and your Liquid Cash on Hand will be a main determining factor in how big of a deal you can afford to do.

For some tips on how to deal with this issue, check out the “Common Reasons Loans Get Denied” FAQ mentioned above.

3.) Property Location.

In some ways this is just a sub-section of The Deal Itself.

Everyone knows that the top 3 components of a property’s value are location, location, and location.

We treat this as its own unique Qualifying Criteria because Property Location really is a strange beast.

The same exact property, in the same exact location, with the same exact numbers, might be something that we can fund today, but would pass on next week.

It might seem ironic since a location never changes, but the Property’s Location is actually the most volatile influencer on its valuation.

Affluent investors, private direct lenders, and underwriters in the hard money space are all very fickle and paranoid, especially in the wake of the Great Recession. One bit of bad news, one localized catastrophe, one sudden micro- or macro-economic shift, and Lenders will instantly decide to stop funding loans in a specific area.

This is not just about certain towns or cities. For some Lenders & Loan Programs, we even get as granular & geotargeted as refusing to fund certain neighborhoods and census block groups!

The most common reasons a location will get rejected are:

  • Extremely high / rapidly rising crime rates,
  • Extremely high / rapidly rising local unemployment,
  • Rapidly rising or overall high percentage of nearby foreclosures,
  • Very rural or low population area,
  • Significant natural disasters (or a high risk thereof), and
  • Rapidly decreasing property values.

Even if your Property Location falls under a few of the above reasons for rejection, it still might be possible to get your deal funded. The only way to know is to check, even for us, as Loan Programs’ terms & availabilities can easily be here today and gone tomorrow.

4.) Monthly Carrying Costs.

The monthly payments on various types of Private Hard Money Loans are all over the place, from 0.4% or less to 1% or more of the total loan balance due each month (depending on the loan’s duration, interest rate, ARM, balloon payments, and more).

Not only that: every Hard Money Loan is also going to require you to carry some type of insurance on the property for the duration of the loan, which might cost a comparable amount to the loan’s monthly payment (as much as doubling your monthly carrying costs!).

The important thing to keep in mind is that nearly every Private Hard Money Loan will have some type of monthly carrying cost with an initial due date ranging from right away during the first month, or possibly deferred as much as 3 – 6 months after closing.

While the monthly carrying costs are usually quite manageable & affordable, especially compared to the typical down payment required for a new acquisition, they’re still vital to take into account when shopping deals and calculating potential ROI.

5.) Borrower’s Experience.

Luckily, at Glassridge we work with all types of Investors, from veteran real estate experts to first-deal beginners.

While a Borrower’s Experience is a crucial Qualifying Criteria, by itself, it is never reason enough for rejection.

What a Borrower’s Experience will have significant impact on is available Loan Programs, Rates, and Fees.

For example, a first-time Borrower who has done less than 2 – 3 deals, especially if those transactions occurred more than 6 – 12+ months ago, will be paying the highest rates & fees of anyone. The only potential counter to this would be if that less experienced Borrower could afford to put a 35% – 45% down payment, which still might only slightly reduce rates & fees (if at all).

On the other hand, a highly experienced repeat Borrower who has done more than 20 deals in the past 6 months, and / or who currently owns 50 – 100+ other properties, will get access to our best Loan Programs and our lowest rates & fees.

The 4 primary factors we consider when evaluating a Borrower’s Experience are:

  1. Total properties owned ever,
  2. Total properties currently owned,
  3. Total properties purchased in the last 12 months, and
  4. Total properties purchased in the last 6 months.

While there’s no shortcut to doing deals, and every transaction takes time (and money), a good lesson to keep in mind is:

The more consistently & rapidly you do deals and pay back loans, the more access you’ll get to:

✓ Lower Rates,

✓ Better Terms,

✓ Higher LTVs, and

✓ Exclusive Loan Programs,

All of which are reserved for only highly qualified, repeat Borrowers.

6.) Borrower’s Credit Score.

Similar to a Borrower’s Experience, a Borrower’s Credit Score (FICO) is rarely reason enough alone for an outright rejection.

However, the available Loan Programs, Rates, and Terms will be significantly impacted when a Borrower has either a very high (720 – 800+) or very low (620 – 550 or below) credit score.

For Borrowers with a very high credit score, a variety of new Loan Programs will be available, even as a first-time Borrower. The most significant improvements will typically be seen in the form of higher available LTVs (up to 75% – 80%+) and more flexibility in property type & Property Location.

Factors like Origination Fees and Interest Rates are typically much more effected by the Borrower’s Experience than Credit Scores, so unfortunately even a 800+ FICO might not save you much on the actual loan costs.

For Borrowers with a very low credit score, we at Glassridge can definitely still get your deals financed. We’ve closed on loans for Borrowers in the low 500s. The places you’ll feel the pain most as a low-credit score Borrower will be in:

  • Fewer Loan Programs available (often leaving only those with higher rates & fees),
  • More onerous & restrictive Loan Terms,
  • More pressure on other Qualifying Criteria, especially Property Location & Exit Strategy, and
  • Lower available max LTVs.

If you’re even considering real estate investing sometime in the distant future, it pays to build your credit starting right now.

If you’re consistently investing in real estate already, you will save millions of dollars over the coming years by systematically building & maintaining your credit. The “how to” for that is beyond the scope of this FAQ, but well worth your time and energy.

We highly recommend Credit Karma for a free view of your personal FICO, and Nav.com if you’re also tracking your business credit score.

7.) Realistic Exit Strategy.

As a Lender, we obviously care a lot about a Borrower’s Realistic Exit Strategy.

The good news is that creating a Realistic Exit Strategy is fairly simple, and is almost never a reason for rejection except in the most unusual & unique Loan Scenarios.

In essence, you have three possible choices for your exit strategy, which will need to be completed by or before the expiration of your Loan Term:

  1. Sell the property. If your plan is to sell, it’s important to be realistic in forecasting your sales timeline & selling price. Look up average time on market, listing price, and final sale price for recently sold comparables, and make a conservative estimation on your own sales timeline & selling price to ensure your Hard Money Loan closes smoothly.
  2. Refinance the loan. A common strategy we help Borrowers achieve is to refi from a 12 month Fix & Flip Loan to a 10 – 30 year Buy & Hold Loan. Similar to your sales timeline, you need to be realistic on a refinancing timeline, especially keeping in mind how long it might take to close on a new loan.
  3. Pay off the loan. Usually this would only be considered a Realistic Exit Strategy for Long-Term Buy & Hold Financing, since Short-Term Fix & Flip Loans obviously come with a sudden, gigantic balloon payment and/or significant late payment fees incurred the moment you pass the ~12 – 18 month Loan Term.

To guarantee your loan closes fast, you can literally just choose one of the above 3 options when you apply (whichever is appropriate to your own situation). So long as you follow that rough template, you will be good to go on your Realistic Exit Strategy, the 7th and final Qualifying Criteria.