How to Qualify for a Hard Money Loan: A Guide for Investors
If you’re investing in real estate or taking on a fix-and-flip project, it’s important to explore different loan options. That said, there are several ways to finance properties, whether it’s with a hard money loan or a conventional mortgage loan. Each option has different qualifications and requirements, so you’ll need to research before choosing one. For example, if you want to learn how to qualify for a hard money loan, just keep reading.
Contents of This Article:
- What are Hard Money Loans Used For?
- How to Qualify for a Hard Money Loan
- How to Get the Best Rate for Your Hard Money Loan
- Benefits of Hard Money Loans vs. Conventional Loans
- Finding the Best Lender for Your Investment
What are Hard Money Loans Used For?
A hard money loan is an alternative financing option that differs from a conventional bank loan. Generally, it’s easier, faster, and more convenient to use hard money loans for certain investments. That said, most investors use hard money loans for the following types of real estate.
- Fix-and-Flip Properties- One of the most common types of hard money loans is a fix-and-flip loan. These short-term loans allow investors to buy and renovate a property to sell for profit.
- Investment Properties- Another common use for hard money loans is for investment or rental properties. For instance, investors who don’t qualify for traditional financing may look to Baltimore hard money lenders to finance properties.
- Commercial Properties– Commercial loans are also common for investors looking to buy multifamily, office, retail, or industrial real estate. Generally, commercial hard money loans have higher limits so that you can fund larger projects.
How to Qualify for a Hard Money Loan
Generally, it’s easier to qualify for a hard money loan than a traditional mortgage loan. However, there are a few ways to prepare before applying for a hard money loan to increase your chances of obtaining one.
- Save for a Significant Down Payment
- Consider Your Credit Score
- Have a Solid Plan for Your Loan
Save for a Larger Down Payment
Most hard money lenders look for a larger down payment compared to traditional loans. However, it’s best to put down as much money as possible for a down payment. Most lenders expect around 10% to 20% of the loan amount for a down payment. However, it depends on your lender, who could require a higher or lower down payment.
Consider Your Credit Score
While your credit score doesn’t necessarily determine whether you get a hard money loan or not, you still want to keep your score up. After all, most hard money lenders want to see a credit score of around 600. However, that’s more favorable than traditional lenders, who generally require a score of at least 620 or higher. So, while it may not be the most significant factor in getting a hard money loan, it’s still worth paying attention to.
Have a Solid Plan for Your Loan
Before a lender approves your hard money loan, they’ll want to see that you have a solid plan for your investment. For example, if you’re investing in a fix-and-flip property, they’ll want to see your renovation plans and costs. On the other hand, they may want to see rent estimates if you’re funding a rental property. As such, you’ll want to show your lender your plans for the property and why it’s a good investment.
How to Get the Best Rate for Your Hard Money Loan
Learning how to qualify for a hard money loan and getting a reasonable rate are two different things. Hard money loans generally have higher interest rates and larger down payments. However, each lender differs in their requirements and rates. That said, you can do a few things to get a more favorable rate. Here are a few examples.
- Show a Good Loan-to-Value Ratio
- Compare Rates from Local Lenders
- Gain More Experience
Show a Good Loan-to-Value Ratio
One of the main factors lenders look at is your loan-to-value (LTV) ratio, which helps assess any potential risks of lending to you. The LTV measures the value of the investment property against the loan amount you’re looking to borrow.
For instance, if you’re looking for a $150,000 loan for a $200,000 property, you’ll divide $150,000 by $200,000 and multiply by 100. As a result, your LTV is 75%. Generally, the lower your LTV, the less risky your investment is for hard money lenders.
Compare Rates from Local Lenders
If you’re looking for a hard money loan, you’ll want to look locally. While several lenders may be available to fund your loan, they may not be reliable. As a borrower, you’ll want to find a lender that’s going to help you meet your investment goals.
Additionally, every hard money lender has different requirements, rates, and terms. So, search your local hard money lenders for one that fits your budget, goals, and expectations for your investment.
Gain More Experience
Newer investors can be a liability for hard money lenders. For instance, some new investors go into a fix-and-flip investment without realizing how much work is needed to complete such a project. As such, lenders may give better terms to more experienced borrowers.
You can gain more experience by working with other investors on fix-and-flip projects. Additionally, you can start building a network of experienced investors, real estate agents, and other industry professionals.
Benefits of Hard Money Loans vs. Conventional Loans
Hard money loans and conventional loans have several distinct differences. For one, traditional mortgage lenders look at your credit score and history as the main determining factor. However, hard money loans look at the value of your property to determine a loan amount. A few other benefits include the following.
- Faster Approval- Compared to traditional mortgage loans that take a month or two to close, hard money lenders can fund investments within a week or two. As a result, you can obtain your property and start renovations much quicker with a hard money loan.
- Easier to Qualify For- Most banks and mortgage lenders look at your credit score or income to determine whether you qualify for a loan. However, hard money lenders are more focused on the value of the investment property, making it easier to qualify for a hard money loan.
- Variety of Uses- Finally, you can use hard money loans for various purposes. For instance, you could finance a rental property, renovate a fixer-upper, or use it as a business loan.
Finding the Best Lender for Your Investment
Learning how to qualify for a hard money loan is the first step in financing your investment property. Once you’ve done enough research, you can save for a down payment and find a hard money lender near you. Generally, lenders are private investors or companies specializing in hard money lending.
If you’re looking for an experienced hard money lending company, look no further than Maryland Hard Money Lenders. Our qualified professionals can help you determine the best loan and rates for your real estate investment. Contact us to learn more about the loans we offer and apply for a hard money loan today.