For starters, it is good to note that the requirements in hard money lending are not as many as those of traditional banks and related financial institutions. This is perhaps why so many people are turning to private money lenders these days.
Your qualification for the financing depends largely on your portfolio. If you have a large equity in the real estate investment, you could qualify faster than an investor with little equity. Additionally, take note of all the following prerequisites that you should have before engaging a hard money lending company.
Equity in the investment or down payment
Just like having equity in the real estate investment, making an impressive down payment serves as security for your hard money loan. In general terms, the required down payment for residential properties is 25-30% while the required down payment for commercial properties is 30-40% of the required loan amount. Though, there are some cases where 0% down payments are allowed but they are rare. These are called 100% LTV loans.
Note that the above are estimates and not industry standards. At times, you may be required to use several properties to qualify for a single loan. As we mentioned earlier, you will qualify for a larger loan if your equity in an investment is high. Similarly, your loan will be approved faster if you make a substantial down payment.
Impressive cash reserves and general financial strength
Do you have a strong financial muscle? Having enough cash reserves to repay your loan is an impressive attribute in the eyes of hard money lenders. Your finances should be so good that you will comfortably pay monthly loan installments plus interests, and still have enough for your day-to-day business expenses.
Good financial strength means that you will afford all the costs of securing the loan. These include insurance, taxes and other related holding costs. Otherwise, loan requests from investors who have no substantial financial muscle are deemed too risky.
Rich history in real estate
Many hard money lenders do not give loans to green and budding real estate investors. They deem the risk to be too much. If you have successfully operated real estate investments in the past, you stand a better chance to qualify for a loan.
Lenders know that your experience serves you right in bringing returns not only for your business but also for their lending services. For this reason, prepare a well-designed exit strategy on how you intend to invest the finances and how you expect to see returns.
Has the road map to financial success in your real estate investment been tried and tested? If it is pleasing, hard money lenders could still finance the idea even when your experience in the industry is not too impressive.
Finally, prepare your statements of account and related business documents to present to your appointed hard money lender. Having these stamped and signed by your primary financial institution goes a long way in getting ready to borrow.
Although your credit score is not usually a requirement, there is no harm in presenting this information to your hard money lender. Your positive credit score and history could be an additional factor to convince them that you are in good books.
If you haven't yet found a hard money lender to work with, you can start here.