Traditional mortgage loans have helped untold thousands of borrowers achieve the American Dream of owning a home, but these conventional qualified mortgages are not always the perfect solution for every borrower.
Some prospective buyers may struggle with credit, some may have intermittent or infrequent income. Some wish to renovate and resell a property, rather than buy a home in which they plan to live in for 20 to 30 years. For these borrowers, a hard money loan may be exactly what they need to make their dreams a reality.
What Do I Need to Get Approved for a Hard Money Loan?
Hard money loans do require loan applications and borrower information such as credit score and income.
However, the hard money application process is far more streamlined than that of a conventional loan, and while this data is certainly taken into account by the lender when deciding whether to approve, the collateral asset (usually property) is of far more interest.
As hard money loans are most commonly given to real estate developers or borrowers who wish to fix-and-flip rehab properties, the lender must analyze the property, confirm that lending against it is a worthy risk, and decide on the amount it is willing to loan.
To determine these variables, the lender needs specific property information from the borrower. For rehab or fix-and-flip properties, a hard money lender will generally require architectural plans of the property, detailed construction budgets, and contractor bid repair sheets.
View Our Blog: How Fast Can You Get a Hard Money Loan?
What is ARV and How Do Lenders Use It?
The lender will also need to know the current value of the property, either through a real estate appraisal, which they will order, or property value estimates from reputable sources such as realtor.com or trulia.com. Using this collated material, the lender will determine what they believe the property’s ARV, or After Repaired Value, will be.
Once the collateral property’s ARV has been resolved, the lender will then determine the amount of the loan. It does this by analyzing how safe an investment the property is, the area in which it resides, the likelihood of the property’s value increasing based on the rehab plans, as well as how much of a risk the borrower themselves may be when it comes to paying back the loan funds.
Hard money loans are designed to be short term in nature and an educated borrower with cash on hand and a plan of action regarding loan repayment may be offered more favorable terms than an unprepared borrower. Hard money lenders can ask for bank statements and other credit history documentation to decide on a borrower’s trustworthiness when it comes to loan repayment.
View Our Blog: How To Flip Your First Home
Hard Money Loan Size and Making Up the Difference
Most hard money lenders will typically offer a loan size of 65% to 75% of the property’s ARV value. This leads to the other element that a hard money borrower is expected to bring to the table: money.
If a borrower has this amount as cash on hand, that greatly increases loan approval chances, as hard money lenders consider this a good faith down payment. If not, hard money lenders may choose to put a lien on another of the borrower’s properties, if applicable.
Borrowers using a credit card or a separate loan to pay the difference on a hard money loan may be considered a higher investment risk and find that they are offered suboptimal financing terms accordingly.
Flipping houses with hard money is better than using traditional mortgage loans. A conventional loan is slow to process and not ideally structured for real estate investments.
View Our Blog: How to Flip Houses with Hard Money
You Need a Lender You Can Trust
A hard money loan is ideal for house flippers who want to get started quickly. Park Place Finance’s team of loan experts has the tools, resources, and experience to handle all of your hard money needs.
If you’re a real estate investor looking for a hard money lender that closes in as little as five days, contact Park Place Finance at 866-407-1599 to get started.