Hard money loans are excellent options for people with poor credit. They also tend to be fast and you can get your hands on the money quickly. This is because they don’t get bogged down in paperwork as much as can happen with traditional loans.
But, just because you don’t have to have perfect credit to get a hard money loan doesn’t mean that lenders hand them out like candy. There are still several hard money loan requirements that you have to meet in order to qualify.
Let’s take a look at what private money lenders will typically look for in a borrower.
The biggest concern for a lender is what they will get out of the deal. They don’t care about what’s best for you, they’re concerned about their bottom line. After all, they’re in business to make money, not be charitable.
So, you’re going to have to show that the deal can prove profitable for them. Here are a couple factors that lenders will look at to give them an idea of profitability.
Loan-to-value simply refers to the ratio between the amount they lend compared to the value of the property. For example, say you wanted to purchase a property that is worth $100,000. You’re asking for a loan of $70,000. In this case, the loan to value ratio is 70%.
Hard money loan-to-value ratios tend to hover at around 60-70%.
This is the reason that hard money lenders in Sacramento CA and beyond are willing to lend to people with poor credit. With a lower loan-to-value ratio, they are taking less of a risk by lending you the money. Plus, they will hold the property that you’re buying with the loan as collateral.
Banks will often accept a loan-to-value ratio as high as 97%! That’s why they are far more picky about who they are willing to lend money to.
So if you want a hard money loan, that means you have to have a hefty down payment, right? After all, the other 30-40% has to come from somewhere.
That’s because the value is taken from the value of the property, not the purchase price. If you make a smart purchase, the property you buy will come with instant equity.
For example, say you’re buying a bank-owned home at a discounted price. The home is worth $100,000 but the purchase price is only $80,000. The home already has $20,000 of equity. You only need to provide another $10,000 to meet a loan to value ratio of 70%.
Pick the Right Project
This makes picking the right project a key factor in your ability to get a hard money loan. If you’re purchasing a property for its full value, you’ll have to provide a hefty down payment. Plus, hard money personal loans have shorter terms than typical bank mortgages, so you’ll have a high monthly payment.
Instead, hard money loans are more often used for the following types of projects.
Sometimes people seeking hard money loans in California need them for extra cash and to pay off an existing loan. They’ll take out a loan for higher than their existing mortgage.
Keep in mind that your home will have to have a hefty amount of equity. Plus, if you can’t pay, the lender has the right to take your home.
We are focusing on business purpose loans, both for owner occupied and non-owner occupied properties.
Your personal qualifications are less important to a hard money lender than to a bank. But that doesn’t mean they don’t care at all. The lender still has the potential to lose money if you don’t hold up your end of the bargain.
To get an idea of your income level, lenders may ask to see your tax returns from the last couple of years. This is so they can verify that it looks like you will be able to make your monthly payments.
They may also take a quick look at your debt to income ratio. If you already have a lot of other debts, that’s a red flag that you may become unable to pay at some point.
If you’re dealing with a fixing and flipping type situation, they’ll look at your experience. If you have a good track record in flipping properties, they’ll be more likely to approve your request.
Even something as simple as being organized when you come to meet with them can have an impact. They’re gauging whether you would be a good borrower to take a risk on. If you have all your ducks in a row, they’ll feel more comfortable handing over the cash.
Do You Meet The Hard Money Loan Requirements?
These are the basic hard money loan requirements that lenders will look for. But not every private money lender in California requires the same thing. Also, keep in mind that the property you’re interested in buying has a huge impact on your chances of being approved.
With ARC Private Lending, we don’t look for reasons to turn people down. Instead, we look for positives that can balance out any negatives in the file. Doing this helps us figure out solutions to get loans done that would be turned down elsewhere.
To find out if you pre-qualify for one of our loan products check us out today! Getting pre-qualified before you find the right property can help move things along once you’re ready to purchase. So don’t wait!