Although getting approved for a hard money loan is easier than getting approved for a traditional bank loan, many hard money loans are turned down. Here are 8 tips for getting a private hard money loan.
- Don’t hide anything. One of the quickest ways to make sure your application is denied is for the lender to discover something that paints your application in a negative light from a source other than the borrower. So be up-front and tell them anything and everything they want to know – even if it is bad. At least if they find out from you, you only have to answer for it and not for why you tried to hide it as well.
- Does the borrower have SKIN IN THE GAME? Does the borrower have substantial equity in the property of 35% to 40% or more? Hard money loans typically are based on the difference between the loan amount and the value of the property. Capital preservation is the KEY for lenders investing in hard money loans. The equity in the property can erode very quickly. It is that equity in the property that provides the room when a problem occurs with the borrower in a foreclosure or distressed scenario to cover the fees and expenses associated with the problem.
- EXIT STRATEGY: How will the borrower exit the loan at loan maturity? Through a conventional refinance? How will the borrower get a conventional loan in the future when they cannot get one now? Will the property be sellable? What is the timeframe to sell? What is the market value? Can the property be sold for the suggested after repair value? Is the planned credit repair viable? With all of these answers to these questions, there needs to be realistic answers.
- DOES THE STORY LINE MAKE SENSE: What is the purpose of the purchase or refinance? Does the loan scenario add up? Who owns the property now? Validate that the Borrower knows the property comps and “After Repair Value.” What are the liens on the property and why are they there? Where is the down payment coming from?
- DON’T SHOP AROUND TOO MUCH! Doing so will eventually get lenders wondering if there is something wrong and if they should trust you.
- DO WHAT YOU SAY YOU ARE GOING TO DO? :Lie or act in a dishonest manner or fail to follow through on something, your integrity will come into question. Lender and investors need to believe in you. Is the borrower litigious? Does the borrower have a history of successful payments or a history of asking for loan modifications? Is the Chain of Title on the property sufficient to allow the borrower or entity to sign for a new encumbrance? Is the borrower’s story about why they need the loan viable? Loans can be mutually beneficial until a problem arises and then a borrower’s character will determine their ability to work through payment or property issues should they arise.
- ABILITY TO REPAY THE LOAN: Where will the monthly mortgage payment come from? Does the borrower have the monthly income to make the payments? Do the bank statements show the velocity to afford the payment? Does the rental income cover the Nut? While Hard Money Ability to Pay/Repay requirement are not defined and as stringent as in the conventional lending world, the ability to repay should be used to ensure proper loan structuring and repayment. The “Ability to Pay” criteria can be satisfied through interest reserves, income, rents, asset depletion, cash in the bank, but not a hope and a prayer or a lottery ticket.
- Bottom line is, “DOES THE DEAL MAKE SENSE?” Is this project financially successful? If the numbers make sense, Private Financial, Inc. will lend you the money. We want YOU to make money on the deal!
When seeking private hard money, keep in mind one thing: While there are regulations involved in hard money lending, there are not nearly as many regulations as in conventional lending. Be flexible and be ready to adjust, if necessary.
Private Financial, Inc.
Real Estate Broker
CA. BRE # 01952914 / 01047826
NMLS # 1172916 / 290528