When deliberating on whether to provide a hard money loan to borrowers, investors look for a series of factors that make it worth the investment. These factors range from the borrower’s Loan to Value ratio (LTV), collateral, and all the way to their credit score. Each factor is important to keep in mind in order to qualify for a hard money loan. Below, read a detailed explanation of each and how you can maintain a healthy profile to be the best candidate for a hard money loan.

 

Hard Money Loan Factors to Keep in Mind

Read below for a comprehensive list of factors to consider when trying to get approved for a hard money loan.

1. Loan-to-Value Ratio

   Before approving a mortgage, investors will look at a borrower’s loan-to-value ratio, or an assessment of lending risk. The loan-to-value ratio in mortgage lending determines the amount necessary for a down-payment and determines whether an investor will want to grant the loan. The formula for calculating an LTV loan is simple: the Mortgage Amount divided by the Appraised Property Value. For example, if a house is appraised at $100,000 and the buyer offers to put 10% down, the LTV would be $90,000. For hard money loans, it is typical to have a downpayment of 25% to 35% when asking to finance a property.

2. Collateral

   Collateral is what the borrower issues to the lender as security in a loan. It is used to minimize risk for those investing in the loan and can be seized and resold if a borrower defaults on a loan. Hard money loans use collateral, typically in the form of real estate, to minimize the risk for investors. With real estate as a form of collateral, borrowers are able to often procure loans for properties in a short period of time.

3. Credit Score

   Although with hard money loans the collateral is real estate, lenders still look at credit score to determine whether or not to give out a loan. Your credit score consists of a few different things, all which showcase to an investor how likely they are to be paid back in a timely manner. Credit scores take into account purchase history, types of accounts, length of credit history, and how much you currently owe. All these things play factors into whether you are a credible borrower. Investors are looking for a low probability of defaulting on loans, so a positive credit history is taken into consideration.

What Do Healthy Hard Money Investment Factors Look like?

To maximize your opportunity of a hard money loan approval, making sure you have a healthy borrower profile is key.

• Credit Score: In order to have a healthy credit score, it is important to address all assets of your credit history. If you have a substantial amount of debt, it is important to budget and aim money towards paying off that debt. A good potential way of tackling this is taking out a personal loan, where once you are approved money is sent to your checking account to use as needed. This money can be used to pay off accruing debt, as long as it is paid back in a timely manner. Furthermore, when considering your own finances, making a scheduled payment plan based on how often you get paid (2 times a month if paid biweekly, more if you are paid more often) is a good way to boost your credit score. The prompter your payments, the more likely you are to secure a loan.

• Collateral: Examples of collateral typically run from paid-off cars, bank savings, and investment accounts. With hard money loans, real estate properties are typical sources of collateral. This allows the borrower to free up cash flow for different ventures, many choosing to invest in further properties. When applying for a collateral loan, it is possible to have a lower Annual Percentage Rate than other forms of loans as the property itself is security. Since real estate is the primary collateral for hard money loans, investors gain security in knowing they can recoup the property if a borrower defaults.

Key Takeaways for Maximum Hard Money Loan Success

When looking to secure a hard money loan, it is important to recognize that it is a multi-faceted venture with a few factors to keep in mind. Improving your credit score is an important way to maximize your chances of securing a hard money loan. Maintaining consistent payments, minimizing debt, and opening lines of credit (responsibly) are all ways to have an attractive borrower profile. Using your real estate as collateral provides assurance to investors, and having a history of being a landlord or flipping houses also attracts investors. Finally, the greater amount you can put down on a property, the lower your LTV. Minimizing your LTV means that you are more likely to secure a loan as investors see you have a stake in the property. 

Your first hard money loan does not have to be an impossible feat. By taking steps to develop a positive, healthy borrowing profile, you will be more likely to secure the loan you need to further develop your portfolio. Being smart and responsible with your money allows for you to be an attractive candidate for investors and open up cash flow to further develop your portfolio.