Hard money loans are types of mortgages used in commercial and residential lending. This type of loan is for borrowers with a lot of cash, but a low credit score. The lender uses collateral against the loan. The security is usually the property the borrower is purchasing. Hard money lenders require the borrowing person to borrow as an entity rather than as an individual.
Hard money loans are fast and flexible, and therefore suitable if you need to move quickly. Also unlike conventional loans, hard money loans (Fix-and-flip loans) can be used to buy distressed properties and other possessions considered risky by traditional financial institutions.
For you to qualify for a hard money loan, a hard money lender will consider the following:
Loan To Value
This is the percentage of the loan in comparison to the value of the property. The loan to value is usually about sixty to seventy percent. For example, if you are purchasing a home at $200,000 and is in need of a mortgage of $140,000, then the loan value would be seventy percent.
A hard money loan is only for the first position and therefore cannot be used as a second mortgage. If you are a borrower who needs second mortgage, lacks equity. Consequently, no lender will lend to such a borrower. This is because, in case of default, a hard money lender will want to be the first in line to recoup any proceeds.
A hard money lender will not lend a borrower more than sixty to seventy percent of the value of the home. Therefore you must purchase a property with instant equity or must have the cash to put down. The cash to be put down is required to be thirty to forty percent of the loan.
A cross lien may perform by a hard money lender in case a borrower does not have thirty to forty percent of the loan down at closing in cash. Here a lien is put on another property a borrower owns that has some equity in it. The lien serves as collateral for the new hard money loan you trying to obtain.
Before advancing to look for a hard money loan, make sure you are qualified and meet the requirements. This can save you a great deal of time.