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What are Hard Money Loan Requirements?

Hard Money Loan Requirements

A hard money loan is a short term loan that is primarily asset-based, meaning the property you purchase serves as collateral. Unlike traditional lenders that focus on credit scores and financial histories, hard money lenders emphasize the property’s value. This makes obtaining a hard money loan generally quicker and more straightforward than traditional loans, especially in competitive real estate markets.

 

This specific type of asset-based loan financing is used by real estate investors and others who are looking to finance non-owner-occupied real estate. The real estate involved with hard money loans can include apartments, single-family homes, multi-family homes, commercial buildings, industrial buildings, and mixed-use buildings.

Key Requirements for Securing a Hard Money Loan

Securing a hard money loan is typically faster than obtaining a traditional loan, with approvals possible within 3 to 5 days. For most hard money lenders, the application process includes several important steps:

Property Evaluation

Lenders will assess the value of the property intended as collateral to determine the feasibility of the loan. This step is crucial to how hard money loan works, focusing on asset value over credit scores.


Loan Application

You will need to provide details about the property, your credit history, and your financial situation. Private lenders value transparency in their financial dealings, which helps establish trust.


Down Payment

A significant down payment, generally between 20% to 35% of the property’s value, is required. The specific percentage depends on the loan-to-value (LTV) ratio. This requirement underscores the nature of most hard money loans as short term loans where quick turnovers are expected.


Exit Strategy

Lenders require a clear plan for the loan repayment, which may include selling the property or refinancing. A well-defined exit strategy is essential to secure loan approval.

Loan Approval

Upon approval, the loan terms must be adhered to as agreed. This includes any stipulations about hard money loan rates which are typically higher than traditional loans due to the increased risk and shorter loan duration.

Additional requirements can include:

Appraisal

An appraisal of the property will be conducted, typically ordered by the lender to confirm its market value. This appraisal is critical in defining the terms of the loan.


Insurance Requirements

You will need to secure an insurance policy where the lender is the loss payee and additional insured. For projects involving significant rehabilitation, builder’s risk insurance is also necessary.


Lender Title Insurance

The lender will need to have lender title insurance. This addition to regular title insurance is actually very cheap, and protects the lender’s interests, ensuring they are the beneficiary in the event of a dispute.


Credit

While a FICO credit score of 600 or above is preferred by many hard money lenders, funding is still possible for those with lower scores, provided the other loan conditions are satisfactorily met. This flexibility makes hard money loans a viable option for various real estate investment scenarios.
Advantages of Hard Money Loans

Advantages of Hard Money Loans

Hard money loans are particularly beneficial for:

 

  • Quick Financing Needs: Approval and funding can occur within a week, unlike the lengthy processes typical of banks.
  • Credit Flexibility: These loans are more accessible to those with poor credit scores, as the loan is secured against the property.
  • Specialized Property Purchases: Investors looking to buy properties that require extensive renovations find hard money loans advantageous since traditional lenders often shy away from such investments.

What is the Appeal of Hard Money Loans Over Traditional Loans?

A traditional loan involves a thorough examination of a borrower’s financial background, including credit scores, debt-to-income ratios, and employment history, which can take months to process. Hard money loans on the other hand focus on the property’s value, significantly speeding up the approval process. These loans are ideal for short-term financing, such as bridge loans in real estate investments.

 

Hard money loans are also more flexible in credit requirements, as they primarily consider property value rather than the borrower’s credit history, enabling individuals with less-than-perfect credit to secure financing.


Lastly, hard money loans can be used for properties in need of renovation, whereas traditional mortgage loans often require pristine conditions. They also provide short-term financing options, aligning well with investors who plan to buy, improve, and resell properties quickly. Lastly, hard money loans typically involve less documentation, simplifying the application process.

When to Consider a Hard Money Loan

When to Consider a Hard Money Loan

Hard money loans are suitable for various scenarios, including:

 

  • Property Flippers: Ideal for investors who wish to renovate and flip properties quickly.
  • Real Estate Developers: Useful for funding construction projects or land acquisitions when traditional financing is unavailable or too slow.
  • Investors Needing Fast Closures: When a property deal requires swift action, hard money loans can close much faster than conventional options.
  • Borrowers with Poor Credit: Hard money lenders tend to loan to individuals with less-than-ideal FICO credit scores. Hard money loans might be an ideal option when traditional lenders are unwilling to provide financing.

Hard Money Loans with West Forest Capital

West Forest Capital provides funds to real estate investors and others looking to finance non-owner-occupied real estate. We fund property types that include apartments, single-family, multi-family, commercial, industrial, and mixed-use buildings.

 

We provide rehab funds, or full construction costs, as needed. We also provide fast closings, almost always less than 12 days, and often as quick as 3 to 5 days. We’ve even previously closed a loan in literally one day. Not the norm, but this can be done.


We lend in New Jersey, New York, Connecticut, Rhode Island, New Hampshire Massachusetts, Pennsylvania, Georgia, and Florida.

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