If you are a real estate investor looking to purchase, renovate, and sell properties quickly, you may have considered using a hard money loan. These loans are a great option for experienced investors who need fast financing for projects like fix-and-flip ventures.
However, before you look into applying for a hard money loan, it is important to understand the hard money loan guidelines that will determine whether or not you qualify. These guidelines differ from traditional loan requirements, with a focus more on the value of the property rather than your financial history.
What Is a Hard Money Loan?
A hard money loan is a short-term loan secured by real estate. These loans are typically offered by private lenders, rather than traditional banks or credit unions. Unlike conventional loans that assess your creditworthiness, hard money loans focus on the value of the property being used as collateral.
Hard money loans are ideal for real estate investors who are looking to flip houses, purchase rental properties, or engage in other real estate investments. These loans provide fast funding. This is important in the competitive world of real estate.
Coastal Capital Lending understands the urgency and importance of moving quickly in the real estate market. Our hard money loans offer high leverage and fast closings. This enables you to seize opportunities and grow your portfolio.
Why Choose a Hard Money Loan?
There are several reasons why real estate investors prefer hard money loans over traditional loans:
- Fast Funding: Hard money loans close much faster than traditional loans, often within just a few days. This is important when you need to secure a property quickly before someone else does.
- High Leverage: Hard money lenders typically offer financing of up to 90% of the property’s purchase price and 100% of the renovation costs. This means you do not need to come up with a large down payment.
- Fewer Requirements: Traditional lenders require a lot of paperwork and have strict credit score requirements. Hard money lenders focus more on the value of the property and your experience as an investor.
- Flexible Terms: Hard money loans often come with more flexible terms than traditional loans, such as no prepayment penalties and deferred origination fees. This flexibility can make it easier for you to manage cash flow during your project.
Coastal Capital Lending offers asset-based lending. This means we focus on the value of the property rather than your credit score or financial history. This is especially beneficial for investors who have had some financial challenges but still want to pursue real estate investments.
Hard Money Loan Guidelines: What You Need to Know
While the requirements for a hard money loan may be less stringent than those of traditional lenders, there are still several hard money loan guidelines you must meet in order to qualify.
Here are the key factors that lenders look at when evaluating your loan application:
Property Value
Since the loan is secured by the property, the lender needs to know that the property is worth enough to cover the loan in case of default. The property’s value is evaluated using an appraisal or a Broker’s Price Opinion (BPO).
Coastal Capital Lending provides loans based on a loan-to-value (LTV) ratio of up to 75-80% of the property’s after-repair value (ARV). This means that once the necessary repairs are completed, the property should be worth at least 75-80% of the loan amount.
After-Repair Value (ARV)
The ARV is the estimated value of the property once it has been renovated. This is particularly important for fix-and-flip investors, as the goal is to purchase undervalued properties, renovate them, and then sell them for a profit.
Lenders will typically want to see an ARV that supports the loan amount you are requesting. If you are borrowing 80% of the purchase price and 100% of the renovation costs, the ARV must be high enough to cover these amounts after the renovation is completed.
Your Experience as an Investor
Most hard money lenders prefer to work with experienced real estate investors who have a proven track record of successful projects. If you have completed multiple fix-and-flip deals or have experience in other real estate investment strategies, you are more likely to be approved for a hard money loan.
Many lenders look for investors who have completed at least two deals within the last 18-24 months. However, new investors may still qualify if they present a strong business plan and a clear exit strategy. While experience can improve approval chances, a well-structured investment plan can also demonstrate credibility to lenders.
Exit Strategy
Your exit strategy is the plan you have for repaying the loan. Hard money loans are typically short-term. Lenders need to know how you intend to repay the loan in a timely manner.
For real estate investors, common exit strategies include selling the property for a profit or refinancing into a long-term loan once the property is stabilized. Lenders will want to see that you have a solid plan for repaying the loan and that your expected sale price or refinancing option is realistic.
Loan-to-Value (LTV) Ratio
The LTV ratio is one of the most important metrics in the hard money loan guidelines. This ratio compares the loan amount to the appraised value of the property. For example, if a property is valued at $200,000 and you are borrowing $150,000, the LTV ratio would be 75%.
Hard money lenders typically lend up to 75-80% LTV–depending on the lender and the property. The higher the LTV, the more risk the lender is taking on. For this reason, it is important to choose a property with a high potential ARV that supports a strong LTV ratio.
Credit Score and Financial History
Although hard money lenders do not typically rely heavily on your credit score or financial history, these factors can still influence the terms of the loan.
A higher credit score may help you secure a better interest rate or more favorable loan terms. However, a low credit score does not necessarily disqualify you from obtaining a hard money loan.
At Coastal Capital Lending, we place more emphasis on the value of the property rather than the borrower’s credit score. This makes it easier for borrowers with less-than-perfect credit to qualify for financing. Nevertheless, having a reasonable credit score can still be beneficial for securing the best loan terms.
Property Condition
The condition of the property plays an important role in determining whether you qualify for a hard money loan. Lenders will assess the property’s condition to determine how much work is required to make it habitable or marketable. If the property needs extensive repairs, the lender may be less likely to approve the loan.
For fix-and-flip loans, lenders generally prefer properties that need cosmetic repairs rather than major structural work. Properties that require significant foundation repairs, roof replacements, or other large-scale repairs may be considered higher risk and may not meet the lender’s guidelines.
Interest Rates and Fees
Hard money loans generally have higher interest rates than traditional loans because they are short-term loans and carry more risk for the lender. Interest rates typically range from 8% to 15%. This depends on the loan terms, LTV ratio, and borrower experience.
Hard money loans may come with additional fees such as origination fees and closing costs. These fees vary by lender, so it is important to understand all the costs involved before applying for a loan.
How to Qualify for a Hard Money Loan
Qualifying for a hard money loan is not as difficult as it may seem, especially if you understand the hard money loan guidelines and meet the key requirements.
Here’s a step-by-step breakdown of how to qualify for a hard money loan:
- Choose a Profitable Property: Find a property with a strong potential for appreciation after repairs.
- Have a Solid Exit Strategy: Know exactly how you plan to repay the loan, whether through a sale or refinancing.
- Show Your Experience: Demonstrate that you have a track record of successful real estate projects.
- Prepare Your Financials: Even though credit score is not the primary focus, having solid financials will help you secure better terms.
- Understand the Terms: Be clear on the LTV ratio, interest rate, and fees associated with the loan.
Securing a hard money loan can be an excellent way to fund your next real estate project. At Coastal Capital Lending, we focus on the value of the property and your experience as an investor. We make it easier for you to borrow with us and access the financing you need.
Our streamlined approval process, flexible terms, and fast closings give you a competitive edge in the real estate market. Whether you are flipping a property, renovating a commercial space, or acquiring a new investment, we provide the capital to help you succeed.
If you are ready to get started with a hard money loan, contact us today to discuss and how we can help fund your next real estate venture!
