Real estate investors who base their business on flipping and building properties often prefer using hard money loans. The speed of approval and the flexibility that hard money lenders offer make private loans appealing to investors.
A hard money loan in Miami is usually easier to get than a traditional loan. However, although the application process may be smoother, there are still some specific requirements an investor needs to meet.
This article will explain the usual requirements for a private loan and suggest some tips on how to improve your chances of getting approval.
Traditional Loan Vs. Hard Money Loan Requirements
Unlike banks, hard money lenders are private investors. They can be more flexible than traditional lenders and are available to many borrowers who can’t get a conventional loan.
Banks and other traditional institutions base their loan approval decisions on the borrower’s creditworthiness, their ability to pay, and their financial history. Private money lenders in Miami want the borrower to back the loan with an asset, and it’s often the real estate the borrower intends to buy.
They usually don’t care about your credit score as much as they care about the value of the property you are buying. If you fail to repay the loan, the lender will take the property as repayment.
What are typical terms for hard money loans?
Since hard money loans come from private companies and individuals, the terms are more flexible than traditional loans. There’s room for negotiation, and the lender can even bend some of their requirements if they’re doing business with a trusted borrower.
However, if this is your first time asking for a hard money loan, you should know the three usual requirements. They include:
Property Equity or Down Payment
A hard money lender will focus on the borrower’s equity in a property and use it as collateral for the loan. Without equity in a property, the borrower needs to put a down payment. Down payments usually range from 30%-40% for commercial properties and 25% to 30% for residential.
Private money lenders will sometimes allow borrowers to use several properties to secure a single loan. The more the borrower invests in the property, the more secure the lender is they’ll get their investment back.
Real Estate Experience
The borrower’s experience working in real estate is vital for most private money lenders. A real estate veteran will probably get a loan approval easier and quicker than a borrower looking to start their first fixer-upper.
However, it doesn’t mean a newbie doesn’t stand a chance. If the borrower has no substantial experience, the lender will want to know the details regarding the project, and they will also need to see the borrower’s repayment plans.
Substantial Income or Cash Reserves
Private money lenders often require the borrower to have the necessary cash reserves to make monthly payments and holding costs. The higher the cash reserves, the better the chance of getting the loan approved.
It’s often hard to get a private money loan without cash reserves. However, since private money lenders can be flexible, some offer a way around it. Sometimes they will increase the loan and hold back some funds to ensure the basic payments are covered. In such instances, the borrower still gets enough funds to start a project while the leader ensures they’ll get their monthly payments.
How do I prepare for a hard money lender?
It’s best to prepare everything before applying for a loan. Some of the basics include:
Prepare A Down Payment
Since the property in question backs the loan, hard money loans usually include larger down payments than traditional loans. The more you save up for a down payment, the better your chances of receiving a loan.
Additionally, you’ll need to cover fees like insurance, underwriting expenses, closing costs, etc. It’s best to ensure you have enough funds for the basics before you ask for a loan.
Prepare a Solid Repayment Strategy
Lenders will want to see your repayment strategy before they approve a loan. Since they are short-term investments, most hard money terms are around 12 months. However, you can get 24 months for specific projects if you have a solid exit strategy.
The usual exit strategy includes selling the property before the loan term ends. Since investors usually use hard money loans for fix-and-flip projects, they typically sell for profit as soon as the work is done.
Prepare Proof Of Income
Hard money lenders may not base their decision on your credit score, but your income will play a role in loan approval. The lender will need to make sure you can make your monthly payments, and the easiest way to do it is by checking your regular monthly income. It may take some documentation and organizing, but it’s still nothing compared to all the paperwork a traditional loan requires.
