General minimum criteria for hard money loans?

10 Replies

Hi all,

I'm thinking about trying to go the route of using hard money loans to finance discounted, off-market deals (probably mostly from wholesalers?) to take advantage of being able to pay cash for properties with instant equity, then rehab if needed, and cash-out refi to repay whatever hard money lender I'd use. At least in theory to me in the last few days of thinking about this, it seems like a solid strategy (please feel free to shoot holes in my theory, I'm here to learn!)

My question is - having never used hard/private money before - what criteria do lenders usually look for before supplying a loan? I have excellent credit and a good income with the ability to save solid chunks of cash every month that I could easily use for down payments with conventional financing if I wanted to.

I'm sure all will be at least a little different regarding borrower requirements, but how can I best prepare to seek hard/private money loans for what I'd like to do? Do they usually need to see X amount of money (maybe a certain percentage of the desired loan amount) in my bank account, or will having high credit/income alone be enough to be deemed a good borrower for these guys?

@Sam T. Sounds like you have things in order in order to get approved for HML. For me personally, they wanted to see 20% down payment, additional cash reserves, and pulled credit to confirm there were no liens, judgments against me, no settling loans for less than the amount owed.

Experience also helps, as well as the deal itself.   Income helps, but they wanted to see cash in the bank to be sure if the project went over budget, I had to ability to finish the rehab. They stated that was critical.   

Good luck!

- Tom

Originally posted by @Tom S. :

@Sam T. Sounds like you have things in order in order to get approved for HML. For me personally, they wanted to see 20% down payment, additional cash reserves, and pulled credit to confirm there were no liens, judgments against me, no settling loans for less than the amount owed.

Experience also helps, as well as the deal itself.   Income helps, but they wanted to see cash in the bank to be sure if the project went over budget, I had to ability to finish the rehab. They stated that was critical.   

Good luck!

- Tom

 Cool, thanks Tom. That's really good to know. This strategy almost seems too good to be true, lol. I'm waiting to find a big flaw in it but can't think of any.

@Sam T. in my area they will generally fund 65% -70% of the cost including repairs. Most expect you to have some money in the game10-20% of the purchase price plus closing costs. typically. Rates are 15% plus three points. 

In addition to the money they want you to put into closing, you will need money to get repairs started. They will fund repairs on a draw schedule. When the first portion of the repairs are done they reimburse your money. Then you use that money to fund the next portion of repairs, which they again reimburse and so on. 

The exact terms will vary by market (mine is high), lender, and experience of the borrower. While they  might fund a new investor they may charge higher rates.

@Ned Carey

Thanks for the reply Ned. I'll go in expecting somewhat higher rates then, considering I'm young and have no experience yet aside from one rental I bought with a conventional mortgage.

By the way, will hard money loans show up on my credit report?

Originally posted by @Sam T.:.

By the way, will hard money loans show up on my credit report?

 Probably not. 

@Sam T.  Regarding your "almost too good to be true" comment, the downside is it's expensive.

As a tip, I started off this way, then starting using small, local banks and their commercial lending department. They were able to advance purchase + rehab funds (80% pur, 100% rehab), no points, 5-6% interest.  Although the expectation was buy and hold.

Hope that helps,

- Tom

@Tom S. Interesting. That does help, thank you. I hadn't thought of that. Here's another question then, since I won't be buying anything until some time next year, do you think I should start working on relationships with local banks (and HML people) now, or when I'm starting to shop for deals I'd actually buy next year? I'm trying to set myself up for success as much as I can in the meantime while I'm getting my savings together.

@Sam T.  Yes, you should at least pop into a few banks in your area, discuss your plans and see what their general terms are.  Some local banks are very local; in my area they only lend in certain counties and not the entire state. 

Once you're comfortable that you may use a specific bank, open a checking account there.  If you're doing rentals, use that bank for the rent deposits and expense payments, then with the next purchase, there's less paperwork as they should be able to see the income and expenses easily.

You will typically need 80% loan to value and debt to income ratio below 50%. There's one lender that goes to 85% LTV but that's the best I've seen. Your going to want to find a lender with no pre-pay penalties, many have a 2 year pre-pay penalty and low points. 2 points is pretty average right now for hard money.

Originally posted by @Rick Momsen :

You will typically need 80% loan to value and debt to income ratio below 50%. There's one lender that goes to 85% LTV but that's the best I've seen. Your going to want to find a lender with no pre-pay penalties, many have a 2 year pre-pay penalty and low points. 2 points is pretty average right now for hard money.

 When you talk about the debt to income ratio, is this referring to just consumer/personal, non-mortgage debt? Or does that include loans on houses?