Hard money loans differ from your standard loans for a variety of reasons. One of the biggest differences between a standard loan and a hard money loan is where the funds are distributed from. Your traditional loans will typically come from banks or other financial institutions. However, hard money loans come from private individuals and institutions with other different dynamics.
One such thing that is different is the requirements for qualifying for obtaining a hard money loan.
Who Qualifies for Hard Money Loans?
What must be understood is that lenders of hard money loans do not look at the creditworthiness of the borrower as much as they look at the value of the collateral (the property).
Regular loans emphasize not only the value of the property, but also the creditworthiness of the borrower. This is because lenders of your standard loans could potentially lose lots of money because of the high Loan-to-Value ratio.
Technically, anyone could qualify for a hard money loan although most borrowers of these kinds of loans are real estate investors. If you have cash on hand, a decent credit history and experience, getting approved for a hard money loan will not prove to be difficult at all.
Which Projects Qualify for Hard Money Loans?
One of the requirements from hard money lenders is that they should form an entity (most commonly an LLC) as opposed to being an individual borrower. Also, lenders will typically require the property to not be occupied by an owner. So for the lifespan of the loan, the borrower is not permitted to live in the property that the loan is covering.
Usually, there are also some geographical requirements incorporated into this approval process. Lenders do not lend nationwide and a few select states are usually targeted. This needs to be checked upon prior to agreement.
A popular strategy that is used in hard money loan agreements is the fix and flip strategy. This entails purchasing the property its current condition, renovating it and reselling it at a higher price than the lump sum of all the repairs that was needed.
Each project comes with their own intricacies, so the lender has to be contacted in advance if the project qualifies.
How Quickly Can The Loan Be Dispensed?
One of the major benefits of getting a hard money loan is that the funds can be dispensed to the borrower very quickly. After gathering all pertinent data, a formal application is usually filled out, and after a brief conversation, you should get a decision on the spot.
After the decision is made and the underwriting process of reviewing the contract is completed, an experienced appraiser inspects the property to ensure that everything is in good standing and that the loan process is smoother.
If everything is in order and both parties have a mutual understanding, the entire process of getting the loans dispensed is usually completed under two weeks. In certain situations, the funds could be dispensed within three days. In terms of the specific amounts that can be given, the usual amount falls from approximately $75,000 to $2,000,000 in residential projects