What Do Hard Money Lenders Require?

Hard money lending is a specialized form of financing, distinct from traditional bank loans. It provides rapid and flexible capital, often secured by real estate assets. This financing serves real estate investors for projects like fix-and-flips, or when conventional options are not feasible. Hard money lenders operate with different requirements and priorities than conventional lenders.

Eligibility Criteria for Borrowers and Properties

Hard money lenders primarily evaluate the collateral property as security for the loan. The property’s equity and its estimated After-Repair Value (ARV) are important, along with its marketability. Lenders commonly finance residential investment properties, commercial properties, and sometimes raw land, generally avoiding owner-occupied primary residences.

Loan-to-Value (LTV) ratios compare the loan amount to the property’s value. Hard money loans range from 60% to 85% of the property’s current value, or 65% to 80% of its ARV for renovation projects. Borrowers must provide a down payment, often between 20% and 40% of the property’s value.

A borrower’s prior real estate investment experience is important, especially for complex fix-and-flip projects. While a long track record is not always mandatory, experienced investors may secure more favorable loan terms. Lenders assess a borrower’s ability to successfully execute the proposed project.

A clear and viable exit strategy for loan repayment is required. This plan involves either selling the property after improvements or refinancing the hard money loan into a more traditional, longer-term mortgage.

Lenders expect borrowers to have sufficient financial capacity, including liquid reserves. These reserves cover unexpected project costs or holding period expenses, such as property taxes, insurance, and interest payments. While credit scores are less emphasized than with traditional loans, lenders still review credit history for financial indicators, with some requiring a minimum credit score ranging from 550 to 660.

Required Documentation for Loan Application

The application process for a hard money loan involves submitting specific documentation about the borrower and the collateral property. These documents assess project viability and associated risks. The loan application form gathers essential information about the borrower and the proposed loan.

For the property, a purchase agreement is necessary if the loan is for an acquisition, detailing the terms of sale. An independent appraisal report, often including both “as-is” and “after-repair” valuations, is also required to establish the property’s current and projected market value. A preliminary title report or commitment is crucial to verify clear ownership and identify any existing liens or encumbrances on the property.

In cases involving renovation or construction, a detailed scope of work and a comprehensive rehab budget are essential. These documents provide a breakdown of proposed improvements, timelines, and estimated costs, allowing the lender to understand the project’s financial feasibility. Visual evidence such as recent photos of the property is also commonly requested to supplement the appraisal. Proof of insurance, including hazard and title insurance, is typically required to protect the lender’s interest in the collateral.

From the borrower’s perspective, a personal financial statement is needed to illustrate assets, liabilities, and overall net worth. Bank statements or other proof of funds verify the availability of down payment capital, financial reserves, and liquidity. If the borrowing entity is a business, such as an LLC or corporation, relevant entity documents like Articles of Organization or Operating Agreements are requested. Additionally, some lenders may ask for a borrower’s resume or an overview of their real estate investment experience to evaluate their track record. While not the primary focus, a credit report may be pulled to provide background information, even if the lending decision is not solely reliant on the credit score.

Financial Terms and Loan Structure

Hard money loans are characterized by specific financial terms and a distinct loan structure that differentiate them from conventional financing. Interest rates for these loans are generally higher, reflecting the increased risk and expedited nature of funding. Borrowers can anticipate rates typically ranging from 7% to 18%, with the exact percentage influenced by factors such as the borrower’s experience, the property type, and the perceived risk of the project.

In addition to interest, hard money lenders commonly charge origination fees, often referred to as “points.” One point equals one percent of the loan amount, and these upfront fees typically range from 1% to 6% of the principal. These fees cover the lender’s administrative costs and are a standard component of the overall borrowing expense. Other closing costs may also apply, including legal fees, appraisal fees, underwriting charges, and title insurance premiums.

The loan term for hard money loans is notably shorter than traditional mortgages, typically ranging from 6 to 24 months, though some may extend up to three years. This short-term nature aligns with the purpose of these loans, which is to provide bridge financing for projects with a defined completion or exit timeline. Hard money loans are not intended for long-term property ownership or financing.

Repayment structures for hard money loans often involve interest-only payments throughout the loan term, with the entire principal balance due as a balloon payment at maturity. This structure helps manage monthly cash flow during a project, as the borrower is not required to pay down the principal until the loan’s conclusion. Borrowers should also be aware that some hard money loans may include prepayment penalties, which means an additional fee could be incurred if the loan is repaid before a specified period.