When taking out a hard money loan, you’ll find that different lenders have different requirements. If you’re still a new borrower, you may not be sure about the criteria used by hard money lenders to grant financing. Fortunately, a hard money lender tends to make fewer considerations compared to traditional lenders. Generally, hard money lenders will look for the following in a borrower.
A Down Payment
If you’re planning to take out a hard money loan, the lender needs to know you’re willing to get some skin in the game. Therefore, making a down payment or having equity in the property is one of the most important things the lender looks out for.
Typically, the size of the down payment depends on whether you want to invest in a residential or commercial property. The minimum down payment ranges between 25% and 30% for residential properties or 30 and 40% for commercial properties.
The more equity you own, the better chances of approval since this reduces the risk for the hard money lender.
Stable Financial Situation
Your hard money lender will also be interested in your personal finances. Their greatest concern is whether you can pay back the loan. Examining your finances enables the lender to determine the risk you pose. Otherwise, if you don’t have adequate cash reserves or a reliable income, it means you will struggle to cover the monthly repayments.
If you prove you have the necessary cash on hand, then you’re more likely to be approved. The lender might request to see your bank statements or income tax returns to verify this.
Real Estate Investor Experience
Remember, the lender always wants to know how much risk you pose. If you have considerable investor experience, they will be more confident about the success of your project. In turn, if your project is a success, it means you’ll be able to pay the loan back as agreed. Borrowers with little experience carry more risk and will need to work harder to convince the lender of their ability to repay the loan.
These are the three most important things that hard money lenders look for in borrowers. The good thing about hard money loans is they’re convenient for real estate investors. According to statistics, the average American has approximately $38,000 of debt, not including mortgages. Fortunately, a hard money loan can be classified as “good debt” if you use it for wealth creation.