Tips to Qualify for a Hard Money Loan

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Hard money loans in Texas are a little bit different from regular bank loans. Those who have never tried to obtain one of these loans before may be a little unclear about what they need to qualify. Compared to traditional loans, there are fewer requirements. These loans are asset-based meaning the lender will mostly look at the value of the property and the borrowers’ equity in the property. The larger the equity, the safer the loan will be for the lender and the more likely they will be to approve the borrower. Lenders also look at the financial strength of the borrower. They want to be sure that you will have the money needed to make monthly loan payments and cover all the other responsibilities of caring for the property. Keep reading to learn more about what lenders look for in a loan application and how you can improve your odds of getting approved.

Down Payment and Equity

The main thing you’ll need to qualify for a hard money loan is the necessary down payment or equity in the property. This will serve as collateral for the loan. For residential properties, the minimum amount ranges between 25 and 30 percent. The minimum increases to 30 to 40 percent for commercial properties. You will have a better chance of qualifying for hard money loans in Houston if you have a larger down payment. The more money the borrower has invested in the property, the less risk for the lender. In some cases, you may be able to use multiple properties to secure a loan. This process is known as cross-collateralizing.

Overall Financial Strength and Cash Reserves

The next thing you will need to have to secure a hard money loan is enough cash reserves to make monthly loan payments and holding costs. The holding costs usually include taxes, insurance, HOA payments, and other costs for property maintenance. The more cash you have to show the lender, the better your chances of approval will be. If you do not have any cash reserves, you will have a hard time obtaining a hard money loan. In certain cases, the lender may be able to increase the amount of the loan and hold back the funds of the borrower to cover the holding costs. This way, the borrower can still get the loan, and the lender will have more assurance that essential payments are being made. 

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Real Estate Experience and an Exit Strategy

Additionally, your lender will want to know that you have experience in real estate. Someone who has been investing in real estate for years and years will have an easier time qualifying for a hard money loan than someone who is trying to fund their very first house flipping project. They will also want to know about the details of the property and the project, especially if you don’t have a lot of experience in real estate. You will need to prepare an exit strategy for the property and how you plan to repay the loan as well.

For more information about hard money loans or to apply for one today, contact us at Investor Loan Source.

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