Hard money loans provide a non-traditional financial solution with flexible terms
and a faster turnaround than the traditional platform. Prospective borrowers
have increased chances for approval when income details are current and with
minimal debt and valued assets.
It’s an alternate and popular way for real estate investors to borrow funds over a
short term despite less-than-favorable credit. Visit
https://www.unasurcds.org/homeowners-guide-to-hard-money-loan/ for a guide
on hard money lending.
Qualifying For Hard-Money Lending to Purchase a
House
Hard money lending, also referred to as bridge loans, are short-term products
borrowers use for property investments or as a solution in cases of possible
foreclosure. Private lenders or investor groups fund these solutions instead of a
financial institution like a bank and require real property to secure the loan.
Hard-money lending is asset-based financing that prioritizes the property value
when approving a loan along with borrowers’ income and debt instead of
assessing credit scoring or past finances. The qualifying criteria for hard money
loans involve the following:
Credit
The credit score is not the primary focus for loan providers when assessing
borrowers for approval. Applicants with a minimum score of 550 + will qualify
borrowers for these products. Some lenders are more lenient, providing loans
with minimum scores of 500 +.
Borrowers need to understand that the loan’s interest rate will be higher the
lower the credit score is. Go here for tips on what borrowers should know about
this private lending.
Income
Lenders don’t base their decisions on financial history or income, but the loan
provider wants to see that the borrower can repay the debt and require proof of
this. This can be shown via pay stubs, tax returns, or banking statements.
The lender will also consider assets and the employer when assessing the client’s
ability to repay the loan. The borrower can show proof of assets or employment,
such as a job offer letter.
Borrowers may not qualify for a traditional 30-year fixed product for a number of
reasons, such as a divorce that impacted credit ratings. Business owners can also
have difficulty proving income.
Self-employed individuals often only have hard money lending as a viable solution
due to taxes not reflecting their ability to repay a traditional product.
A rare but common scenario is homeowners with houses with much equity but at
risk for foreclosure. Hard money lenders present a solution but need assurance
that they will be able to achieve a first mortgage payoff by selling the property
and gain a profit with the sale if the loan defaults.
Hard Money Lending Compared to Traditional Products
Hard money lending is distinct from traditional products in several ways. Let’s
review the differences.
Income
The application and closing process for hard money lending is straightforward and
quick compared to a traditional product, and the repayment term ranges shorter
than a standard mortgage, which runs as long as 30 years. The product can last
from a minimum of six months to as long as roughly 18 months.
The interest rates
The interest rates for these loans run higher than those for traditional products
since the value is calculated in the underwriting process more so than the credit
score.
The down payment
With a conventional or FHA loan, borrowers are required to put approximately
three percent of the loan amount down. Hard money lenders ask that the client
set as much as 20-30 percent minimum as a down payment.
Hard and soft loans also have distinctions.
Hard lending
Hard lending is secured by physical real estate with the value assed by its equity.
These loans are considered “nonrecourse,” which means if the borrower defaults,
the result is to forfeit the collateral.
Soft lending
These products are secured by credit, and the borrower is obligated to repay the
total loan balance. The lender considers creditworthiness and the ability to repay
in the application approval process. If a default occurs, the borrower is
responsible until the balance is satisfied.
Getting A Hard Money Loan
When you decide to pursue a hard money loan and have a down payment, the
loan process is relatively straightforward and quick. The first step is to find a
lender, which is distinct from searching for a traditional provider.
Referral: It’s helpful to have connections in the real estate community, such
as a realtor, real estate attorney, or a settlement agent. These professionals
will have a network of lenders, including hard money providers, and can
refer you to a reputable choice.
Title: Hard money lenders have loans recorded with title offices routinely.
Associates with these offices can also provide adequate references for
lenders in your area.
Online: You can also search for a loan provider with a solid reputation
online.
Applicants must meet certain qualifications when lenders assess details for
approval. This varies from one loan provider to the next, but standard eligibility
criteria include:
Credit score minimum set by the lender
Minimum DTI ratio
A 20-30 percent down payment
Proof of income
Valued asset
When hard money loans qualifications are met, the following steps will need to
be followed to move forward in the approval process.
Documents: Gather requested documents such as photo ID, proof of
income, banking, and other account statements.
Repayment: The term for hard money loans is short, making it necessary
for borrowers to have a repayment plan.
Compare providers: Compare multiple loan providers to receive the most
competitive rates and minimum fees. When you find the most suitable
product, you can move forward with the application process.
