Brought to you by Maryland Hard Money Lenders, LLC:
Secure financing for your next real estate investment project by getting a full picture of what lenders are looking for and how you can meet their criteria. Unless you have a stack of cash, if you want to grow your investment portfolio, you’ll most likely need to take out a loan. While conventional mortgages and banks are a quick go-to for many people, for investors looking to close time-sensitive deals, hard money loans are a better option because they’re faster and have more lenient requirements.
However, that doesn’t automatically guarantee you a yes. A lender can still reject your application if you don’t match their requirements, but here’s how to increase your chances of a hard money loan approval.
Hard Money Lending Criteria for Applicants
Property Value
Conduct a thorough market analysis of your current market value before presenting it as collateral. While bad credit may not count against you to a hard money lender, a low-value property certainly will. After all, hard money loans are asset-based, which means the borrower uses the property they’re purchasing as collateral, which the lender can reclaim if you default.
Naturally, that means hard money lenders are hesitant to grant approval to cover loan amounts when the property has little worth. On the other hand, a high-value property with a low LTV (loan-to-value) ratio represents less risk for your lender and a higher likelihood of a yes.
Potential After-Repair Value
Get an estimate on your property’s after-repair value to figure out how much potential your application has. Beyond the current market value, lenders also like to bet on the future, and if you can show them that your renovation plans can significantly improve the property’s worth, they’re more likely to be intrigued.
You have to do a lot of research on the ROI your repairs have on the house. You can’t just replace all the floors because it’ll be prettier to switch to modern tiles. Always consider the potential return on investment you get from a remodel and how it affects the property’s after-repair value.
Borrower’s Experience
Consider how much experience you have in real estate before applying for a loan, because your lender is probably doing it too. Aside from submitting proposals with properties that have decent value, some investors still face rejection because they lack experience. While an experienced investor can transform a dump into a 5-star oasis, a newbie might struggle with breaking even on a home with great potential.
As a result, lenders are often biased toward investors with a proven track record of flipping houses, upgrading rentals, or refinancing property. However, if you meet the above requirements, you may need to explore these possible reasons why your loan applications are denied.
Being Transparent with Low Credit Standing
Address the Issue
Be proactive in addressing the elephant in the room when you have a low credit score. Some investors make the mistake of trying to bury their less-than-perfect credit history under lots of paperwork, but that could have the opposite effect and raise red flags.
Even though hard money lenders are more lenient to investors with bad credit scores, it still gives the impression that you’re less trustworthy with money, so you need to address it head-on. Start by giving a brief explanation of why your credit score is low, such as a recent job loss, medical bills, or juvenile decisions.
Highlight Your Strengths
Emphasize the property’s potential and the expertise you bring to the table. After explaining your low credit standing, refocus the application on how your investment is a solid opportunity that profits the lender.
Go into details about your current financial capabilities and demonstrate your realistic ability to repay the loan on time, amidst your other debts. You can paint a more vivid picture by providing details about your income, assets, and other investments.
Presenting a Clear Exit Strategy
Selling After Renovation
Use the “fix-and-flip” approach to quickly recover your money and pay off your loan. By nature, hard money loans are short-term loans, which makes them ideal for investors looking to do a house flip. With the right know-how, in a couple months, you could buy a property, make some cosmetic changes, and sell it for a huge profit. However, this strategy requires some expertise on repair projects so you can present a realistic timeline for your renovation.
Experienced investors often recommend opting for lenders that specialize in the type of property you plan to flip. For instance, flipping a commercial property often takes more time than a residential one, so if you present your application to a lender that deals mostly with residential homes, they might feel your timeline is too long and reject your application. That’s why it’s essential to work with an expert hard money lender in Baltimore to ensure your application will be assessed fairly.
Refinancing with Conventional Loan
If you’re looking for quick financing but need a little more time to pay off your debts, consider improving the property with funds from a hard money loan, and then using a bank loan to cover it. While this exit strategy requires a stronger financial profile to get approval for a typical bank loan, at the end of the day, you’ll have a lower-interest loan that you can pay off in bits for years.
This option is more popular with investors that aren’t looking to sell, and perhaps want to hold for a longer period or convert a distressed house into a rental property. When done right, the rental income could even cover your mortgage repayments, leaving you with a tidy profit.
Conclusion
Hard money lenders may have more lenient criteria but no application is immune from getting a dreaded denial. However, you can improve your chances of getting a hard money loan on your next application with the tips mentioned in the article above.
Make it harder for your lender to turn you down by selecting qualified properties that have a great market value and high after-repair value. Be prepared with a realistic exit strategy to meet repayment terms. On the other hand, if you’re coming up short because of a low credit score, address the issue immediately. Also, if you have experience, focus on your strengths and leverage them to gain more trust from your lenders.
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