Hard Money Lender and Credit Qualifications - By: Louis Jeffries

Hard Money Loan Financing.

As a real estate investor there may come a time that it is to your advantage to get a Hard Money Loan (HML, bridge loan, private financing or equity based loan) for a transaction that you can not get financing from a conventional lending. As a matter of fact even if the rate and fees may be higher on an HML it may be better for you even if you qualify for conventional financing. These short term bridge loans can help you close a "HOT" real estate investment deal and utilize creative financing that you may not have been able to employ using conventional financing. The objective is to make money. Private money programs are designed to do just that. They help the borrower make money as well as the lender, with as little red tape as possible.

How to Qualify for a Hard Money Loan.

The underwriting by HML lenders is different from conventional. Yet the criteria reviewed is the same. Basic underwriting reviews the 4 C's of credit. They are Collateral, Capacity, Credit and Character. Each criteria is looked different based on the program. Let us compare the two.

Collateral.

Whether conventional or bridge financing both place a heavy emphasis on the property, which is the collateral. From a conventional perspective the value is always based on the lower of the purchase price or the appraisal. Another critical underwriting guideline is ownership seasoning (how long the owner has owned the property). Standard guidelines view the value as the lower of the appraised value or purchase price for the first 12 months of ownership. A Bridge Funding Lender will consider the After Rehab Value as well as the purchase price. As such a conventional lender may lend 80% of the value to an investor while a HML lender only lends 65% of the ARV. The 65% may actually be higher.

Capacity.

This is the ability to repay the loan. For the traditional investor loan the lender underwrites the gross income and compares that to the long term debt to determine if the borrower can afford the payment based on preset debt to income ratio requirements. Where the bridge loan lender reviews the file they want to make sure the borrower has a solid exit strategy to pay off the loan completely. If they require monthly payments they do review debt ratio's to insure the borrower can make the payments. The ability to repay the loan is important in both situations because all lenders want their money back to make more loans. Contrary to popular belief Private lenders do not want the property. If they did they would just invest in below market distressed property. They have the money. No, they are in the loan business. They make their money by making short term loans and reinvesting the proceeds to make more short term loans.

Credit.

While excellent credit is essential to a convention financing source it is not so important to a Hard money lender. If your exit strategy is to refinance the property the lender wants to ensure you can. But if you are going to sell, they are more concerned that you have a buyer that qualifies to buy the property. This goes back to the importance of a solid exit strategy.

Character.

A conventional lender really can not and does not make personal character determinations about a borrower. They only look for compensating factors like time on the job and stability factors. Savings and assets are important as well. For a bridge program, the lender can talk to the borrower, review their experience and they have much more flexibility based on their feel for a borrower. After all this is private money and no one can dictate who the lender will lend their money to when it is for business and investment purposes.

Real Estate Investor.

With this information in hand a real estate investor can know where they need to improve to guarantee success of their investment projects. If you are in the business of buying and rehabbing investment property, whether commercial or residential it is important to prepare yourself for financing. Access to capital is a very important part of the success of any business, especially that of a real estate investor. Hard Money Loans will help you have a very profitable business.

About the Author

Louis Jeffries is a Mortgage Banker for 20 years with established relationships with private investors who make hard money loans for residential and commercial projects. For financing of your real estate investment deals, whether commercial or residential contact me at 708-299-3244 or email me at louisj@alldominionmortgage.com Hard Money

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