Faster funding speeds and more lenient qualification standards are among the biggest perks that hard money loans have to offer. Nonetheless, there are still qualification requirements that you’ll need to satisfy as a real estate investor when you apply for financing. 

Most hard money lenders require a hefty down payment, experience as a real estate investor, a good personal credit score, and a certain loan-to-value ratio. 

Requirements for Hard Money Loans

Qualifying for a hard money loan may be easier than getting a commercial real estate loan. Nonetheless, you’ll need to meet certain qualification criteria before a hard money lender may be willing to work with you. 

Below are four types of requirements you may encounter when you apply for a hard money loan. 

Minimum Down Payment

There’s no universal down payment size requirement for hard money loans. Every lender and investor is different and will have its own criteria for borrowers to satisfy. 

With hard money loans, it’s common to encounter minimum down payment requirements of 25% to 30% for residential property purchases. For commercial properties, the minimum down payment requirement might increase to somewhere between 30% and 40%. 

Yet just as with a traditional loan, it may be possible to find lenders who ask for less money down. This may be especially true if you have good personal and business credit working in your favor. 

They may also require that you fund property repair costs.

Real Estate Experience

Private money lenders usually want proof of your real estate investment experience. Borrowers with years of experience may find it easier to qualify than newcomers to the field. If it’s your first time buying an investment property, you might struggle to qualify for a hard money loan. 

If your hard money loan is to fund a fix-and-flip, the lender will want to know that you have a successful track record of managing similar projects.

Minimum Credit Score Requirements 

Many private money lenders only approve hard money loan applications with a personal FICO® Score of 680 or higher. Others may want proof that you also have an open business credit file that you manage well. 

Haven’t started to build business credit yet? Don’t fret. You may still be able to find a private money lender that will work with you.

Traditional lenders may impose a waiting period before you can qualify for a new loan after derogatory credit events like bankruptcy, foreclosure, etc. Such obstacles could be a problem even if you’ve worked hard to build business credit separate from your personal credit profile. 

Hard money lenders, by comparison, may be willing to approve you for financing sooner. The deal simply needs to make sense from an investment perspective. 

Maximum Loan-to-Value (LTV) Ratio

A loan-to-value (LTV) ratio describes the difference between the loan amount and market value of a property. It’s a critical factor that helps lenders assess the risk of a loan application. 

With a conventional loan, a lender might be willing to loan you up to 97% of the value of the property (assuming you have good credit). A hard money lender is likely to prefer a much lower LTV ratio — often 65% to 75% of the value of the property you’re purchasing. 

The property value may be determined in several ways. A hard money lender may use either an appraisal or a broker’s assessment. If they know the local market well, they may not request those documents. 

The important factor here is that you get a property under contract significantly below it’s market value so that you can fix it up and sell it at a profit.

Who Should Consider Using a Hard Money Loan?

An investor who needs quick access to funding might benefit from a hard money loan. If you’re facing heavy competition for a particular investment property, the ability to pay the seller quickly might offer you an advantage during negotiations. 

Hard money loans also work well for properties with significant damage. Houses that need big repairs don’t qualify for typical financing, so regular consumers never buy them. These severely damaged properties can make the perfect acquisition target for the savvy investor.

For long-term financing, a hard money loan isn’t a good fit. If you plan to buy and hold a property for the foreseeable future (rather than doing a fix and flip), an alternative loan program would probably work better for your borrowing needs. 

Pros and Cons of Hard Money Loans

Pros

• Funding Speed: Qualified borrowers may be able to access funds within a few business days. 
• Lenient Approval Criteria: A hard money lender tends to be more flexible than a conventional lender when it comes to approval criteria, even with income challenges and property damage.
• Less Documentation: Private money loan underwriters likely won’t request as much documentation as you would have to supply for a bank loan.

Cons

• Higher Interest Rate and Fees: Hard money lenders charge high interest rates, fees, and closing costs than you’d find with traditional financing options. It’s not uncommon to encounter interest rates in the double digits. 
• Less Regulation: Private lenders aren’t bound to follow the same rules as banks, credit unions, and other lenders that are regulated by the Federal Reserve. 
• Expedited Repayment Period: A hard money loan will likely feature a shorter loan term, such as 6 or 12 months. 

FAQs

What Is the Typical Rate of Interest Charged on Hard Money Loans?

Interest rates on hard money loans can vary depending on the lender and other factors pertaining to the risk of the loan. For this reason, it’s smart to shop around if you’re considering a hard money loan to make sure you find the best deal available. 

It’s common for hard money lenders to charge interest rates that climb into the double digits — sometimes as high as 15% or more. However, a less risky borrower might be able to secure rates of around 8% according to Rocket Mortgage. 

Hard mony loans usually charge upfront points as well.

Are Hard Money Loans a Good Idea?

A hard money loan can be expensive with a high-interest rate and shorter repayment terms. As a result, the private money loans can be difficult to afford and might put you at a higher risk of foreclosure. 

For certain projects, however, a hard money loan might make sense. You should make sure to have a good exit plan and be comfortable with the risk and cost before applying. 

Where Can I Get a Hard Money Loan?

Comparing multiple loan offers is important with hard money loans, just as it matters with other types of conventional financing. If you’re searching for hard money loan offers to compare, you may be able to find hard money financing solutions at both the local and national levels.

Private lenders that issue hard money loans aren’t regulated by the federal government in the same way as traditional lenders. So be sure to take some extra time during the research phase to make sure you’re dealing with a reliable company. 

Online reviews and reports from former borrowers may help you gain some insight into a hard money lender’s reputation. The lender may also be able to provide you with a portfolio of completed projects upon request. 

What Is a Hard Money Loan? 

A hard money loan is a real estate financing option from a private lender or private investor. These non-conforming loans are typically asset-based. The value of the property is a primary factor that a lender uses to determine whether to approve or deny your funding application. 

Hard money loan terms tend to be short, anywhere from 6-24 months. 

It’s common for hard money lenders to charge high-interest rates and sometimes balloon payments that could put you at a higher risk for foreclosure. The loans may also include prepayment penalties that could cost you extra money if you decide to repay the debt early. 

Another detail that sets hard money loans apart from a traditional real estate or business loan is funding speed. With a traditional mortgage, funding typically takes a month or more after the seller accepts your offer. Yet hard money lenders may issue funds within a matter of days. 

The “hard” in hard money loans is derived from the asset (aka the property) that you pledge to secure the loan. As with any secured loan, if you default, the lender can seize the asset and resell it in an attempt to recuperate the funds it loaned you. 

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