What is a hard money loan?

Hard money loans are predominantly asset-based, collateralized by the property in question. Investors prioritize the value of the asset over the borrower's credit and financial history. Although a borrower's creditworthiness plays a significant role in setting interest rates, loan amounts, and terms, the qualification for these loans is primarily based on the lender's specific underwriting criteria.

‍What are hard money loan requirements?

^{Experience is crucial in determining loan amounts, interest rates, and associated underwriting fees.}

To get preapproved for a hard money loan in the private lending market, real estate developers must show a strong record of completed real estate deals with the following: 

• Purchase price of a similar loan size that they are applying for
• As-is value of all the flipped properties
• Complete renovation budget
• After-repair value and final sale price

Next is a solid exit strategy. As a real estate investor, you may decide to sell your investment property after the renovation is complete or keep it as a rental. You'll need to develop an exit strategy that keeps your lender up to date on your business. 

In asset-based lending, 

• Property value (After-Repair Value or ARV): Hard money lenders base their decision on the property's potential value after all repairs and renovations are completed. This is assessed through desktop property analysis or a third-party appraiser's report to determine the maximum loan amount.
• Loan-to-Value (LTV) ratio: Private lenders like Asset View Capital typically offer loan amounts ranging from 65% to 75% of the property's value for fix-and-flip or ground-up construction, and 70% to 80% for rental properties. The reduction in loan offerings is to give us some leverage in case the investor defaults.

Investor qualifications

• Down payment or equity: Investors are required to put down a significant amount of their own capital, typically 20–30% of the property's value. This provides the lender with assurance that the investor is motivated and has "skin in the game".
• Clear exit strategy: Lenders want to see a well-defined plan for repaying the loan within the short-term loan period, typically 6 to 36 months. Common exit strategies include selling the renovated property for a profit (flipping) or refinancing with a traditional, longer-term mortgage.
• Financial stability: Although creditworthiness is not the primary focus, lenders still need proof that you can make monthly payments and have cash reserves. They may review your bank statements and other financial documents to ensure you can cover holding costs, such as taxes and insurance.
• Real estate experience: A track record of successfully managing and completing similar projects, such as house flips, can increase your chances of getting approved. For first-time investors, other factors, such as a larger down payment or an extreme deal, may be given closer consideration. 

The approval process

1. Submit your private real estate loan application. The application process for short-term hard money or long-term rental loans is generally faster with private lenders like Asset View Capital. If all underwriting documents are submitted and accepted within a week, your private real estate loan could clear to close within two weeks.
2. Loan terms are presented and negotiated. If the deal is considered sound, the Asset View Capital will show a loan offer outlining the interest rate, origination fees, repayment schedule, and other key details. Due to the higher risk, interest rates and fees are typically higher for short-term hard money loans, but the risk exposure on long-term rental is also relative.
3. Closing and funding. Since hard money loans are short-term, the closing process is significantly quicker than a traditional mortgage, with funding often available in a matter of days or weeks. 

1. Some Key Underwriting Documents to be considered for Short-term Hard Money Loans:

• Well-executed purchase and sale agreement between the seller and buyer
• Property appraisal
• Scope of work
• Permits and Architect Letter
• HUDs - Refinance
• Plans
• Entity Documents: Certificate of Organization, Official IRS EIN Letter, Operating Agreement
• Insurance: Hazard Insurance is another essential part of the process because it protects the investment property during renovation
• Title Availability: Another important document that may delay a loan closing is the title. If the title of a proposed property isn't clear, that will definitely delay all the closing activities.

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^{Real estate investors who consistently engage in the market often receive greater loan leverage compared to newcomers.}

Thus, partnering with seasoned real estate investors is beneficial for gaining expertise in property valuation, renovation, construction cost estimation, permitting, invoicing, evaluating licensed contractors, and ensuring compliance with building codes.

Having a clean criminal record can expedite the approval process for real estate investors. While some hard money lenders may disregard certain questionable aspects of a prospective borrower's background, these issues can sometimes cause delays in the loan approval process.

Finally, ensure you save at least 25% of the total project cost to commence renovation or construction as soon as your hard money loan is finalized.

Hard money loans, though short-termed, it could lead to softer way of growing your tomorrow's real estate investments today! Get started

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