What Does A Lender Look For When Making A Hard Money Loan?

Real estate investors looking to fund their new project often consider applying for a hard money loan. There are several reasons for this, the primary one being that private lenders have more liquidity and fewer restrictions than bank loans. As a result, the funding process is much faster and more convenient. 

Unlike traditional financing institutions, professional hard money lenders are free to set their own criteria for each loan. Banks have to follow FHA guidelines, but private lenders do not. Instead, they take a pragmatic approach and assess the feasibility of the entire project. They also make sure to establish an effective exit strategy to repay the loan before it reaches maturity. 

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The lender bases the decision to approve the loan on the property’s profitability and the proposed deal. They don’t rely as much on the borrower as traditional lenders do, so if your credit score isn’t fabulous, you may still get a hard money loan as long as the property is profitable and you have a solid business plan. 

Private lenders will estimate the value and the after-repair value of the property before making their decision. Once they do that, they will offer to lend you a percentage of that value. In most cases, they offer 60-70%. 

Real estate investors who are working on home rehab projects find hard money loans very valuable. The structure of private loans is ideal for investors who have funds to pay thirty to forty percent upfront. Additionally, the higher interest rates are suitable for those looking to renovate and sell a property quickly. 

Hard Money Loan Requirements

Hard money loan requirements may vary from state to state and also from lender to lender. They are usually very flexible since they come from private individuals or organizations. 

However, there are four general private money loan requirements lenders usually want to see:  


Hard money lenders want to see you are invested in the entire project. They want to see you are willing to lose some of your assets, too. The best way to show your level of commitment is to put down a larger down payment. It will show the lenders that you are a serious investor. 

One of the main requirements of most private loans is having the funds for down payment or equity in the property the lender can use as collateral. The minimum down payment is usually from 30%-40% for commercial properties and 25%-30% for residential ones. 

In some cases, the lender allows you to use multiple properties to secure one loan. The official term for this option is cross- collateralizing

The higher the down payment or equity, the bigger the chance you have to secure a hard money loan. Moreover, the more you’re invested in the property, the lower the lender’s risks are. 

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Financial Strength

Private money lenders prefer borrowers who have the necessary funds to make the monthly loan payments or any holding costs. Holding costs may refer to taxes, insurance, HOA payments, among other things. 

The bigger the borrower’s cash reserve fund is, the more likely he is to get approval for a hard money loan. Applicants with no cash reserves may have a more challenging time obtaining a loan from some private lenders. However, there are cases where the lender is willing to fund 100% of the down payment. 

Moreover, the lender sometimes holds back some of the funds they lend as a security to cover the monthly payments. In such cases, you still get a loan, and the lender has secured the monthly payments, so it’s often a win-win situation. 

The Profitability of the Property

Hard money lenders want to know about the potential of the property you’re looking to fund. They’re looking for a profitable asset and a reasonable business plan. 

For example, if you’re an investor who’s looking to fix & flip a property, the lender will want to know you can buy the property at a low cost, include inexpensive repairs, and make a decent profit when you sell or rent the final result. 

Once they see you have a solid plan and a valuable property, they will be more willing to approve the loan. 

To show private lenders that the property is profitable, prepare estimated values of other properties in the area so they can see you’re getting it at a fair price. Also, estimate repairment costs and an expected sales price after the fix. A thorough fiscal representation of your plan and the property will usually get you a long way. 

Real Estate Experience

Most private lenders will want to know about your level of experience in real estate investing. Borrowers looking to fund their first fix and flip project may have a more challenging time obtaining a private loan than an investor veteran. However, that doesn’t mean a beginner can’t get a loan.

If you have little real estate experience, the lender will want to know all the details of your project. Most importantly, they will want to know about your exit strategy should anything go wrong and you become unable to repay your loan. Having a precise plan about returning the loan is essential for investors who don’t have vast prior experience. Moreover, having funds for a significant down payment is another way to secure a loan for beginners. 

Showing the lenders how much research you’ve put into the entire project and property itself is critical for approval.

If you have a track record of successfully executing similar real estate projects, the lender will approve the loan upon researching your real estate history. The more experience you have in the real estate market, the more likely you will get approved for a loan. 

Many real estate investors choose hard money loans because of the fast pace of the market. It doesn’t wait for anyone, and hard money loans get funded much quicker than traditional loans. When an excellent opportunity presents itself, it’s critical for a real estate investor to act quickly. Hard money loans allow them to thrive in the market and be faster than their competition.