hard money loan

How Do Lenders Approve Borrowers For Hard Money Loans?


Hard money loans are a financing option of choice for many real estate investors who need quick funding to secure good deals in the market. These loans come with flexible terms and a faster turnaround than traditional financing. Private money lenders or hard money lenders offer these loan products at a slightly higher interest rate. The loan also comes with a shorter repayment period, making it great for professional house flippers and real estate investors.

Before issuing the loans, hard money lenders require borrowers to pay a down payment besides using the property as collateral. Also, most lenders do not consider the borrower’s credit history before issuing the loans. This makes hard money loans an excellent pick for investors with a poor credit history.

 If you are considering taking a hard money loan to finance a fix-and-flip, residential or commercial property, there are some requirements you must meet. We have rounded up some hard money loan requirements below. 

Qualifying for a Hard Money Loan 

Unlike traditional loans from banks and lending institutions, hard money loans have a few and less stringent qualification requirements. These requirements will also vary from one lender to another, as some may introduce new conditions to minimize risks. For instance, most lenders will not check your credit history. However, some will only accept your loan application if you don’t have a sizeable credit card loan. Here are the key qualification requirements every lender will check:

Real Estate Experience 

The real estate investing market can be quite volatile, and seasoned investors often have the skills and experience to navigate such uncertainties. Hard money loans also come with slightly higher interest rates, often from 6% to 12%. The shorter repayment period of 12 to 36 months also means you’ll need a robust strategy for repaying the loan. 

Lenders are aware of this, and they will prioritize lending to real estate investors who have a proven track record. If you are new to the real estate investing market, not many lenders will be comfortable approving your loan application.   

 Overall Financial Strength 

Private money lenders often check the borrower’s financial strength to ensure the borrower won’t be overwhelmed in repaying the loan. Factors such as the sources of income, average monthly income, average expenditures, etc., are key indicators of financial strength. The lender may also want to know if you have other assets or investment properties.

 Most lenders will be comfortable approving your loan if your investment portfolio is impressive. Some lenders will also use your financial strength to decide the loan amount they can offer. You can prepare in advance and keep records of your assets and investments. That way, you’ll have an easier time convincing your lender that you are eligible for the loan.

Down Payment 

This is perhaps one of the critical requirements to qualifying for a hard money loan, i.e., regardless of who the lender is or the amount you are applying for. Often, the lender will decide on a reasonable down payment based on the value of the property and the risk they are likely to incur. You’ll be given a few days to pay the down payment before the lender proceeds to process the loan.

If you fail to raise the down payment within the allocated time, you won’t qualify for the loan. The typical down payment for hard money loans is 25% to 50%. In most cases, raising a higher down payment reduces the risk for the lender. So you may benefit from lowered loan rates.  

Enough Cash Reserves 

Raising a down payment and showcasing your overall financial strength isn’t enough to qualify you for a hard money loan. You still need to have enough cash to settle some closing fees, homeowners’ association fees, home insurance, maintenance fees, etc. Your lender will need to be sure that you can afford these fees before approving your loan.

Having enough cash reserves also mean that you can comfortably pay the interests on the loan for the first couple of months, i.e., while you are handling renovations or finding someone to buy or lease the property. The lender may estimate your cash reserves using your income sources, expenditures, active loans, etc. 

Getting Started With Hard Money Loans

 Now that you know what hard money loans are and the typical requirements you need to qualify, you want to choose a reputable private lender within your area. Always do your research and consider as many options as possible before making up your mind.

Ask around for the best lenders in your town and check their quality of services, customer reviews, rates, repayment terms, etc. If you do this right, you’ll identify a few lenders who will meet your expectations. Book a consultation with them and be keen to inquire more on fees and terms & conditions to help you make the right choices.