First of all, what is a hard money loan? A hard money loan is a short-term loan for individuals purchasing real estate. Hard money loans are popular among real estate investors because they are flexible, approval is fast, and can be funded in a matter of days.
Because traditional lenders have strict regulations for loans, it can be extremely difficult to qualify. There is no room for leeway or negotiation, even if your credit score is just a point off. Since hard money loans are collateral based, the lenders are not really concerned with the borrower’s credit. Hard money lenders are able grant loans to individuals with bad credit because they focus mostly on the value of the property since the property serves as collateral.
The reason why hard money lenders are not concerned with the borrower’s credit is because hard money loans are collateral based. They are typically willing to accept different types of collateral as long as the borrower can present profitable collateral to secure the loan. The borrower can use any property they own as collateral as long as it is not owner-occupied. The property which will serve as collateral may be one the borrower already owns or it may be the property the borrower is acquiring.
This is where the loan-to-value (LTV) comes into play.
The LTV is the percentage of the loan to the property value. The LTV is a measure of risk used by lenders. The maximum LTV ratio for most hard money loans is usually around 50% to 70%. To find the maximum LTV, multiply the value of the collateral by the LTV percentage. For example:
- House price: $300,000
- Loan-to-value: 70%
- Maximum loan amount: $210,000
Hard money lenders are experienced and can help you with your investments and work with you to find a loan that works for you. When you are investing in real estate, you’re not just looking for financing. When it comes to traditional loans, the bank will not be involved in your investment.
