Real estate investors who haven’t yet used a hard money loan often have questions about what exactly is required to qualify for hard money loans. There are very few requirements and whether it is a fix and flip loan, investment property loan, bridge loan, purchase loan, or cash out refinance loan, the requirements are generally the same. Hard money loans are collateral-based, which means the lender’s focus is primarily on the borrower’s equity in the property and the value of the property. The greater the borrower’s equity, the less risk for the lender and the higher likelihood the loan will be approved.

Hard money lenders also need to ensure the borrower is financially strong enough and has adequate cash reserves to cover all of the holding costs for the property while the loan is outstanding. The borrower must also have some knowledge or experience in real estate and a plan for repaying the loan (exit strategy).

1. Equity in the Property / Down Payment

The primary requirement for getting approved for a hard money loan is bringing a sufficient down payment (or equity in the property). The lowest amount for residential properties is typically 25 - 30% and commercial properties 30 - 40%.

The larger the down payment (or equity in the property) the more likely the loan will be approved. A larger amount invested in the property presents a lower risk situation for the hard money lender.

2. Cash Reserves on Hand & Financial Strength

Another requirement for a hard money loan is for the borrower to have adequate cash reserves in order to pay for various costs during the course of the loan such as monthly loan payments, taxes, insurance, HOA payments, etc. A larger reserve of cash will increase the likelihood of the hard money lender approving the loan.

For borrowers without the necessary cash reserves, a lender may be able to hold back some of the borrower’s funds and increase the loan amount. The funds would then be used to pay taxes, insurance, loan payments and other holding costs. The borrower would still be able to get the loan and the hard money lender would feel more comfortable knowing the payments would be taken care of.

3. Real Estate Experience and an Exit Strategy

Residential hard money lenders are going to want to know about the borrower’s real estate experience. A borrower trying to get funding for their first fix and flip is going to get more scrutiny from the hard money lender than a real estate investor with multiple projects and years under the belt.

Especially for a borrower with little experience, the lender is going request more information about the property and project. The borrower is going to have to have a reasonable game plan and exit strategy to make the lender feel comfortable that they will receive their money back.

Original Article Published at northcoastfinancialinc.com: Hard Money Loan Requirements