Hard money loans offer speed, flexibility, and security which attracts real estate investors. If you want to flip or build a property, then a hard money loan is the right way to go. What are the application requirements for hard money loans? Continue reading to find out.
Save Up a Down Payment
Looking at the application requirements for hard money loans, your down payment is the main requirement lenders consider when assessing your application for a hard money loan. Hard money lenders almost always require a down payment on a loan. Your down payment will serve as collateral on your loan, and hard money loan applications with large down payments have a better chance of getting approved. Keep in mind you will still have to cover closing costs, fees, and underwriting expenses on top of your down payment.
Prepare Proof of Income
Although you will not need as much paperwork when securing a hard money loan versus a traditional loan, you will still need to prepare your proof of income. Your lender needs documented proof that you are able to make the monthly payments on your loan. Your proof of income should show the average hours you work weekly, your yearly salary, and any passive income like capital gains or interest.
Have Experience in Real Estate
When applying for a hard money loan, the lender will look at your experience in real estate. Although experience is not a requirement when applying for a hard money loan, those with more experience in the field tend to get approved at higher rates than those who do not have any experience. For borrowers with little experience, the lender will want to know the details of the project, so have an exit strategy prepared.
Prepare an Exit Strategy
Having an exit strategy is one of the most important requirements for a hard money loan . Your exit strategy will tell the lender how you plan to pay back your hard money loan. Since hard money loans are generally short term, lenders will expect for you to have prepared an exit strategy. Some exit strategies include selling the property, refinancing the hard money loan to a conventional loan, or selling off other investments to pay off the hard money loan. The most common strategy is to sell the property within the loan period.
Have Liquid Reserves
Having “liquid reserves” means having capital that retains value and can be used quickly whenever you need it. The cash in your bank account is considered to be a very liquid asset as it can be pulled out and used immediately. The stocks you own are considered to be less liquid since brokers will often take a fee when selling. Real estate is not considered to be a liquid asset since it takes time to sell and costs money. Hard money lenders want to see that you have sufficient liquid reserves before lending you money. The more liquid reserves a borrower has, the more confident the lender will be when approving an application for a hard money loan.
Assess the After-Repair Value (ARV)
The after-repair value of your property is an estimate of your property’s worth after you have completed all renovations and improvements. The after-repair value of your property is calculated by comparing other properties similar to yours. Lenders will look at the location of your property, the age, the size in terms of acreage, and the style of construction. Hard money lenders will compare your property’s ARV to its as-is value to evaluate a borrower’s loan application. The greater the difference between the two, the more likely the loan will get approved.
Find a Reputable Hard Money Lender
One of the commonly ignored requirements for hard money loans is the reputation of your hard money lender. When applying for a hard money loan, you want to rely on a reputable lender to secure an application with. Uncover the lender’s true reputation by checking social media and online reviews. Since many lenders are private individuals or businesses that are not a bank, finding a reputable lender is essential when applying for a hard money loan. If you are not sure what to look for, consider asking yourself these questions:
Can you provide a portfolio or reference I can call?
Do you require an appraisal?
What documents are required to get a loan?
RCN Capital offers short-term and long-term financing options for real estate investors. Whether you are looking to fix & flip properties or hold properties for rental income, RCN has flexible options that are suited to your needs. Connect with us today to discuss your next real estate investment.