Hard Money Loan
A residential hard money
is an asset-based,
for any type
of residential property anywhere from 1-4 units
, both owner occupied and non-owner
It is extended to borrowers who either do not qualify for a traditional
bank loan or are in a great hurry to obtain a loan and do not have the
time to go through the longer bank loan process.
became the preferred foreclosure prevention
method, many borrowers who wanted to keep their homes and have
substantial equity, borrowed residential hard money loans to stop
foreclosure. Doing this allows them to borrow enough money
either pay off the foreclosing lender, or pay the delinquent amount and
reinstate their existing
loan. This buys more time to come up with a
plan to save their
home without the added pressure of a foreclosing lender breathing down
If your loan modification request has been turned
down by your bank, or if you just need to tap into your property's
equity but cannot qualify for a bank loan, a residential hard money
loan may be the solution for you to resolve your situation.
How to Qualify for a
Residential Hard Money Loan
lenders advertise that the only criteria you need to meet, no matter
hard money loan
type, is a minimum
amount of equity (typically around 35% equity or greater - meaning the
loan amount you seek to borrow is not higher than 65% maximum of your
property's current market value). For example, if your
current market value is $100,000, the loan amount you are requesting
cannot be more than $65,000.
How Hard Money Lenders Think
in my past experience as both a hard money broker and a hard money
lender, most private or hard money lenders look at the combination of
certain criteria which paint a big picture of how much risk your loan
request represents to them.
This includes your ability to repay the
loan, the likelihood that you might default, if the property's value will
hold up, and
in the worse case scenario, a
foreclosure. These criteria are combined to determine the
involved for the hard money lender and if they can recoup
investment plus fees and costs incurred in the event that you default
they have to foreclose.
hard money lenders do not want to end up owning your property because
it's just too much hassle. They would much rather sit back
collect the high interest payments from the loan they extended to you.
They provide you a loan that no one else wants to give
you at the time that you need it. And for that, they charge
interest rates and fees. This is important to keep in mind.
course there are predatory lenders out there, but in reality, they are
the exception rather than the rule in hard money lending. Do
due dilligence on the lenders just as much as they do their due
dilligence on you. Ask as many questions as possible until
feel comfortable you have a good deal. If ever in doubt, have
experienced attorney go over the terms with you as well as look over
your loan documents. It's a small
price to pay for your peace of mind.
here for a list of questions to ask your potential hard money lenders.
Here are the criteria that hard money lenders typically use
to underwrite a residential hard money loan:
- As I mentioned above, this one is typically the most important
qualifier. There must be enough equity in the property. This
the first thing you will be asked because there is no sense in moving
forward if this criteria is not met. This is calculated using
Loan-To-Value (LTV) ratio:
Loan-to-Value (LTV) Ratio =
Balance + Delinquent Amount + Costs & Fees + Cash Out + Other
- Loan-To-Value (LTV) Ratio
- The LTV must not exceed 65%. In fact, many hard money
today have reduced their LTV maximum to 50-60% because of the current
market conditions and the continuing decline in housing values.
It would be prudent to stay under 65% LTV
in order to get
approved for a residential hard money loan. This means taking
less cash out, or settling other liens (if any) for cents on the dollar
with other creditors, or negotiating less costs and fees.
- Ability to Pay - Most
residential hard money loans used to be approved based on "stated
income", but new
regulations for owner
occupied properties compel hard money lenders to verify
your income to make sure you have the ability to make your new monthly
- Exit Strategy - Hard
money lenders put a lot of weight on your plan to repay the loan --
otherwise known as your "exit strategy". Lenders would like
to know how they will get their money back after the term of your loan
is finished. The
viability of your exit strategy often makes
or breaks the deal so make sure you've got a good plan
for either a
refinance or sale of the property once the loan matures.
- Property Condition and Location
- Many hard money lenders will conduct their own site review of the
property to inspect its condition as well as its location even if there
is an appraisal of the property. In my experience, most
individual lenders prefer to do residential hard money loan on a
their local area where they know the market well. This also
gives them the ability to conduct a site review fairly easily.
Hard Money Basics
Hard Money Loan Types
Hard Money Lenders
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