Residential Hard Money Loan

A residential hard money loan is an asset-based, non-bank loan for any type of residential property  anywhere from 1-4 units, both owner occupied and non-owner occupied.   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.  

Before mortgage loan modifications 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 to 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 their neck.

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

Many lenders advertise that the only criteria you need to meet, no matter the residential 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 property's current market value is $100,000, the loan amount you are requesting cannot be more than $65,000.

How Hard Money Lenders Think

However, 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 risk involved for the hard money lender and if they can  recoup their investment plus fees and costs incurred in the event that you default and they have to foreclose.  

Most 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 and 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 higher interest rates and fees. This is important to keep in mind.

Of course there are predatory lenders out there, but in reality, they are the exception rather than the rule in hard money lending.  Do your due dilligence on the lenders just as much as they do their due dilligence on you.  Ask as many questions as possible until you feel comfortable you have a good deal.  If ever in doubt, have an 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.

Click 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:

  • Equity - As I mentioned above, this one is typically the most important qualifier. There must be enough equity in the property.  This is 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 the Loan-To-Value (LTV) ratio:  

Loan-to-Value (LTV) Ratio =

(Existing Loan Balance + Delinquent Amount + Costs & Fees + Cash Out + Other Liens)

Current Market Value 

  • Loan-To-Value (LTV) Ratio - The LTV must not exceed 65%.  In fact, many hard money lenders 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 mortgage payments.  
  • 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 property within 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

About Private Hard Money Lenders

California Hard Money Loan

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