Taking out a hard money loan is generally faster and easier than getting a loan from the bank, but sometimes people confuse this for being easy. Hard money loans still have requirements that you must meet, though they are different from traditional bank loans. Still, it’s important to be prepared and understand the regulations you’ll need to follow to get financing for your fix and flip project.
Below are the top regulations to know before taking out a hard money loan.
Down Payment/Equity
The main requirement for obtaining hard money is having the necessary down payment or equity in the property. This serves as your collateral and is the main reason why hard money lenders worry less about credit scores and payment history. They care more about the value of the property and your equity in it. The larger your equity is, the safer the loan is for the lender. This makes them more willing to work with you.
The amount of equity needed in the property varies depending on the lender you are working with and your relationship with them. Typically, lenders like to see 25-30% for residential properties and 30-40% for commercial properties.
Overall Financial Security
Hard money lenders prefer working with borrowers who have the cash reserves to make monthly loan payments and other holding costs, such as insurance, taxes, HOA payments, etc. These expenses must be taken care of until you sell the property to someone else.
Showing that you have cash reserves indicates to the lender that you will be able to pay for these costs rather than them falling on someone else. If all of your money is tied up in the house, you can consider increasing the loan, but the lender will hold back your funds to cover these costs.
Experience in Real Estate
Everyone has to start somewhere, but hard money lenders feel most comfortable working with borrowers who have some experience in the real estate industry. Having experience in this field means that you are more likely to stay on task, maintain a reasonable budget and have an exit strategy in place (how you plan to repay the loan).
Conclusion
Even though hard money loans have far less regulations than traditional bank loans, there are still things that make you a good candidate. Obtaining hard money loans will become easier over time as you complete more projects, gain experience in the industry and form relationships with hard money lenders.
To discuss your options for hard money, contact First Funding Loans today. We have solutions for all types of real estate financing.