When looking to finance your next real estate investment deal, you may find that seeking out a private lender for a hard money loan is a good option for you. Conventional lending options may not be the best choice for a variety of reasons, such as they take too long to fund and have a lot of restrictions that may be prohibitive. Conversely, a private hard money loan is much more flexible in its requirements and has more liquidity, funding the loan more quickly.
What Lenders Look for When Making a Hard Money Loan
What do private money lenders look for when determining eligibility for a new borrower? Since private money lenders are private individuals, they can have as many or as few requirements as they desire. Therefore, every hard money lender is different and will have varying requirements. That said, there tend to be a few commonalities among most private money lenders that they will use to determine eligibility. Here are a few things that a private lender may consider.
Commitment Level
One of the most critical factors a private lender looks for in a hard money loan borrower is how committed they are to the property. They want to ensure you’re just as invested in the property as they are and that you have a willingness to lose as well. This level of commitment is typically achieved by putting down a significant amount for the down payment, showing lenders just how serious you truly are.
If you’re willing to put a significant amount of money into the project upfront, thereby putting yourself at risk if the deal doesn’t produce, a hard money lender is more apt to apply their funds. For this reason, a hard money lender usually offers a lower loan-to-value (LTV) ratio than a conventional lender. In addition, this assures that there will be enough equity to pay off the loan in the unfortunate event of foreclosure.
If you cannot provide a large down payment, perhaps a tertiary investor would be willing to help you with the down payment. You can also show future labor as part of your contribution to make up for a lower down payment. The overarching idea is that you must prove you have something to lose if the investment doesn’t go as planned.
Profitability Potential of the Investment Property
Right up there with how committed you are as an investor is the potential the investment property has to be profitable. An example of a high profitability potential could be a fix-and-flip investment. Investors who purchase a house, fix it up, and then sell it at a profit are known as fix-and-flip investors. If you can prove that you can buy a property at a great price, fix it up in a reasonable amount of time, and then sell it at a significant profit, the lender could be willing to ignore other factors and lend you the money.
The other benefit for the lender, in this case, is that if you cannot repay the loan or fail at flipping the property, the lender should easily be able to sell the property and get their investment back without too much trouble. If there isn’t much potential in the property, it could sit in limbo with the lender incurring holding costs — a suboptimal situation.
To show a potential hard money lender that the property could turn a significant profit, you can show estimated values of comparable properties in the area and how quickly comparable properties have sold. If you can offer a high probability that the investment will turn a profit, they are much more likely to lend you the money.
Risk Level
Most private money lenders will look at your history with previous real estate investments and how much experience you have in the real estate investment arena. They’ll look at your track record of turning a profit on your previous investments, especially in those situations similar to the one you’re looking to finance.
If you’re looking to fund a fix-and-flip property, the lender may ask if you have successfully renovated and sold properties at a profit. Lenders may also look at whether or not you have fixed up and rented out a property before. They may also ask if you have purchased a commercial building that turned into a profitable investment. These are essential criteria for any hard money lender.
That doesn’t mean that if you’re new to this, you have no chance of getting a private hard money loan. You can compensate by increasing your standing in the other categories, such as having a more significant down payment and fully detailed information about your plan, including budgets and quotes. If you do a considerable amount of research before and can show this to a potential investor, you’ll significantly increase your chances.
Are You Looking for a Hard Money Loan in Florida?
The fact is that hard money lenders want to ensure, at a bare minimum, that they will recoup their funds. They ultimately want to make a profit on all investments, but their minimum is that they won’t lose money. When a private investor engages in a hard money loan, it’s a business transaction in which the lender looks to make money. The last thing a hard money investor wants to do is take possession of a property and be responsible for the holding costs and management, both in time and funds.
And from the real estate investor’s standpoint, choosing hard money as a funding source makes sense because the market is volatile and doesn’t wait for anyone. You need to move quickly when you have a good project setup, which means accessing funds rapidly. Conventional loans can take far too long to fund and inhibit your ability to capitalize on a good deal. Hard money loans can be funded in a few days, making it far easier to capitalize on opportunities as they arise.
Contact us today for more information about hard money lending or to determine what the investors at Titan Funding look for when making a hard money loan. A team member would be happy to answer your questions and discuss lending options with you, including a hard money loan or a fix-and-flip loan. You can reach us via our secure online contact form or call us at 855-928-0737 to get started.
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