Real estate investors have several options for project funding, but for fast turnaround times and lower than average LTV, they cannot beat hard money lenders. Private lenders charge more in interest than traditional loans, but the repayment plans often balance out for the investor when they consider profit potential over time.
Unfortunately, not every investor is a suitable fit for a hard money loan. Some real estate professionals are too new and present too much risk for the lender, and others just do not have a good plan. If you want to get a hard money loan, then it pays to know what private lenders look for in a borrower. Most lenders look for three characteristics in every potential borrower.
1. Ability To Repay The Loan
The primary aim of all hard money real estate lenders is to mitigate their risk by ensuring that a borrower can repay the loan. However, while banks and other conventional lenders rely on the creditworthiness of the borrower, hard money lenders are more concerned with the property value and potential rental income, especially after renovations.
If the value of the building or residence is enough to cover the loan, then many private lenders may overlook a less than optimal credit score, especially if the borrower has a construction skillset or a history of successful house renovations.
2. Exit Strategy and Experience
While a lender will take the value of the property into account when deciding on a loan, they would still prefer to get their money back so that they can lend it to someone else. Therefore, a thorough lender will want to know your plans and exit strategy for the current investment property. What work is being done?
How long will it take to finish? Based on market research, how long to think the rehabbed property will take to sell? Make sure you come with a well-researched proposal and that you bring some experience to the table. If you are inexperienced, consider partnering with a real estate professional to lend creditability to your plan.
3. Financial Stake or Risk
Most hard money lenders will expect a significant down payment, typically between 20% and 30%. The down payment shows lenders that you are putting yourself at financial risk, which provides assurances for the lender.
If you do not have the money, you can work with a secondary investor or partner, but that will cut into your profits. Do you plan on contributing to the project, through labor or other improvements? If so, a lender may accept that rather than the full down payment. The goal is to show lenders you have something to lose should the project fail.
Hard money lenders offer a significant advantage over conventional institutions, but they are not willing to lend to everyone. You must prove you are a cable and informed borrower and that you also have risks tied up in the investment. If you would like to learn more about borrower expectations, contact a local hard money lender for more details.