Categories: Blog

How to Prequalify For a Hard Money Loan

Hard money loans are very different from traditional home loans in that hard money lenders don’t ask about the borrower’s qualifications.

Traditional lenders typically ask you about your credit score and your personal debt-to-income (DTI) ratio. Hard money lenders are an altogether different animal because we care more about the value of the property and the loan-to-value (LTV) ratio once you finish rehabbing it.

So if you’ve been wondering what questions a hard money lender would ask you, or what are the qualifications needed to get a hard money loan, I’m going to break it all down for you right here. You can also check out this video I made on the topic 😎:

It’s All About Your Creditworthiness

As a lender, we want to know if you are creditworthy. One of the things we look at is your FICO score.

You might not qualify for a loan if your FICO score is below 620. That is unless you can give us a good explanation on why your score is that low. Even so, your rates will most likely be higher than those with a better score.

You also need to show us that you have enough liquid reserves. If you’re not getting a construction loan, do you have enough money to finish the rehab?

On top of that, do you have enough money to pay the closing costs and still have 6 months of reserves for your monthly payments?

Lenders are in the business to generate loans and earn a profit based on the interests from the borrower. We hate it when a borrower defaults which then forces us to do the work of foreclosing on the property and putting it up for sale to recover our losses.

Having Experience Matters

Being a brand new investor doesn’t mean you can’t get a hard money loan. It just means that to us, you’re a riskier deal because you don’t yet have systems in place or contractors that you trust and work with. This means you’ll most likely get charged higher rates.

A top tier investor who has done 20+ deals in the past two years often gets the best rates from us.

How Much Skin In The Game You Have

Some investors do structured deals where they get a hard money lender to cover the majority of the purchase price then they get a gap lender or a second or junior lien.

We do accept this at times, but this is actually riskier for lenders because the borrower has less skin in the game. If something were to go bad, borrowers are more likely and willing to just walk away because they didn’t put their own money at risk.

Sometimes what we do instead is ask the other partner to be the gap funder and have them on the title. This way we have the recourse to go after the other assets if in case the sale of the property wasn’t enough to cover the entire debt.

What’s Your Business Plan And Exit Strategy

Are you planning on just winging everything from the start or do you have a plan laid down?

Hard money lenders want to know you have a plan. So tell us how you plan to turn an unattractive property into a home you can make a great profit from.

Do you know how much you are estimating to spend during each phase? How long will each phase take?

Convince us that you’ve got everything planned out, so we’d be confident to lend to you.

Things We Want To Know About The Property

Purchase Price and Costs

How much are you buying the property for? If you’re buying from a wholesaler, what is the assignment fee?

For those taking out a hard money loan to do a refinance, we want to know how much you originally paid when you bought the property and other information related to the closing costs.

We might also ask for collateral. So if you have other properties, you could offer those to get a lower LTV.

Property Type

Hard money lenders also want to know what kind of property you’re getting. Is it a single-family home, duplex, triplex, apartment, commercial, or hotel?

If it’s mixed-use, meaning it’s both a commercial building and a residential one, let us know the mix whether it’s 2 bedrooms or 3 bedrooms with the commercial building at the bottom.

Your Rehab Plans

It’s best to also have an estimate of your rehab budget. Split it into hard costs like labor and materials, and soft costs like applications fees, architect fees, city planning fees, etc.

Include as well if you’re doing a structural rehab or a cosmetic rehab, and if you plan to do new construction on the property.

Your Project Timeline

Give your lender a projected timeline on how long you think the project is going to take. Will it be a 4-month flip or will it be a 2-month redevelopment project?

The Projected Final Price

Finally, we want to know what’s the projected after repair value (ARV), how much the property would sell for, and how you were able to get to that number.

What Happens Next

Once we have all that information, we’re going to do our own due diligence on the back end to make sure the numbers you sent us are within the same ballpark.

Then, we’re going to look at your own track record to see if you’ve been successful in paying on time and in doing multiple projects in the past.

Based on all of that, we’re going to use our own formulas to compute the rates and terms that we’re going to give you.

Again, while a brand new investor without a good track record won’t get our best rates, you will still end up with competitive rates.

Remember, hard money loans can provide you a great opportunity to get bigger projects and start building your fortune in real estate. So what are you waiting for, reach out to me to get started on getting your hard money loan!