How Do Lenders Evaluate a Property for a Hard Money Loan?

Hard money loans are an alternative financing option investors use to buy real estate. Typically, they’re used for quick projects or by investors who don’t qualify for a traditional mortgage loan. Either way, the qualifications and terms for hard money loans are much different than other loan types. Ultimately, lenders spend a lot of time evaluating the property you want to finance and your plan to repay your loan. Today, we will review how lenders may evaluate a property and the factors that impact their lending decisions. 

Contents of This Article: 

• When Should You Use a Hard Money Loan?
• How Do Hard Money Lenders Evaluate a Property?
• Tips for a Smooth Borrowing Process
• Work With a Trusted Hard Money Lender

When Should You Use a Hard Money Loan?

If you’re unfamiliar with them, hard money loans are short-term, non-conforming loans that investors can use to secure real estate deals quickly. That said, hard money loans are great in several scenarios. Whether you’re looking for quick funding or you don’t quite meet the qualifications for a traditional mortgage loan, hard money loans can come in clutch. Here are some common scenarios where investors use Maryland real estate loans. 

1. Fix-and-Flip Projects- One of the main reasons people use hard money loans is to fund a fix-and-flip project. Securing a short-term loan quickly allows investors to buy a property, renovate it, and sell it for profit at the end of the loan term.
2. Time-Sensitive Deals- A traditional loan can take several weeks to be funded. However, hard money loans can be funded within just a few days, depending on your lender and how they evaluate a property. This makes it great for investors needing to secure a deal fast.
3. Bridge Financing- Some people use hard money loans as temporary financing (sometimes called bridge financing) when they’re transitioning to a long-term loan or waiting for a property to sell. 
4. Qualification Issues- Most traditional lenders have strict criteria for borrowers. For instance, they look deep into your credit and financial history and want to see steady proof of income to ensure you pay off the loan. Hard money lenders will also look at these factors but don’t hold as much weight. Instead, they’ll evaluate the property you’re buying to ensure it has potential and that you can pay off the loan by the end of the term.

How Do Hard Money Lenders Evaluate a Property? 

Instead of digging deep into your credit score or financial history, lenders spend a lot of time evaluating the property you’re looking to fund. They will want to see your detailed plan for the property, how you’ll pay off the loan, and how much the property will be worth after you renovate (if that’s your plan). Here are some factors that help lenders evaluate a property and consider a loan.  

• After-Repair Value (ARV)- Lenders want to see that your repairs will increase the value of the property, and you’ll be able to repay the loan with the money you get from selling it. That said, lenders typically loan up to 80% of the after-repair value (ARV).
• Property Type- Hard money lenders typically give out loans for residential fix-and-flip projects, although they may consider other property types. For instance, some lenders fund commercial properties or new construction projects.
• Location- Most lenders, whether hard money or traditional mortgage lenders, will look at the property’s location. After all, properties in more desirable or appreciating markets are more attractive and less risky for lenders.
• Condition- Traditional lenders may see properties that need renovations as risky. However, hard money lenders understand the fix-and-flip process and will lend money for it as long as the investor has a clear plan and budget for repairs.
• Exit Strategy- Finally, your exit strategy is one of the biggest factors for hard money lenders. It’s crucial to have a solid plan to repay the loan, whether you refinance it or pay it off by selling the property. Generally, a well-thought-out plan is necessary for approval.

Tips for a Smooth Borrowing Process

If you’re looking to get a hard money loan for your next investment, you’ll want to know how to prepare. While the lending process is fairly quick, it’ll be even quicker once you find the right lender, have your documentation ready, and have a clear plan for your investment. Here are a few tips on how to prepare.

• Prepare Documentation- If you’re looking at a fix-and-flip project, you’ll want to come up with a detailed plan that includes the purchase price, repair costs, expected timeline, and ARV. Additionally, like with any loan you take out, you’ll need to prepare documentation regarding your finances and personal information.
• Find the Right Lender- Finding the right hard money lender for your investment is crucial. Ultimately, you’ll want to work with an individual or company experienced in funding the type of loan you need. So, do your research, check reviews, and ask for references.
• Understand the Loan- Hard money loans are different from traditional loans. They often have higher interest rates, fees, and prepayment penalties. You’ll want to know exactly how much you need to budget to avoid any surprises later on.
• Have a Clear Exit Strategy- As mentioned above, your exit strategy is crucial for lenders and can impact whether or not they fund a loan. So, demonstrate to your lender how you’ll repay the loan or transition to another financing option.
• Build a Relationship With Your Lender- Finally, working with the same lender on multiple investments can help you secure better terms and faster approvals.

Work With a Trusted Hard Money Lender

Hard money loans are useful for many investors, especially those needing quick financing and a short-term loan. That said, knowing how a lender may evaluate a property can give you a better understanding of how hard money loans work. Most lenders look for a property in a good location with potential after being fixed up. 

Are you looking for a hard money lender near Baltimore? Maryland Hard Money Lenders can help fund your next project today! Our team of lending professionals can help you determine the best loan for your investment and fund it quickly. Contact MHML today to learn more, or fill out our initial loan application now!