Hard money loans are asset-based loans. The biggest factor that affects approval for traditional loans is income and credit history. Hard money lenders use the property as collateral and “hard” asset. When borrowers want loans rapidly or when traditional lenders shall not approve loans, hard money loans Houston are the only option.
Reasons for using hard money
Hard money loans are for those borrowers who cannot receive traditional funding.
• Speed
As money lenders are focused mostly on collateral and less concerned with the financial position, these loans are closed quickly compared to traditional loans. These hard money lenders will not take a lot of time to process the loan application such as reviewing bank statements, verifying income, and others. The loan process moves quickly and they close the deals that traditional lenders cannot do.
• Flexibility
Hard money loans are more flexible compared to traditional lenders. Here, a standardized underwriting process is not used rather each deal is evaluated separately. According to the situation, the repayment schedules are tweaked.
• Approval
One important factor for hard money loans is collateral. The lender shall lend as much as the worth of the property. If there are negative items in the credit report and you have a foreclosure then some lenders do not look at your credit.
Requirements for hard money loans
For real estate, hard money loans have very fewer requirements than traditional bank loans. These are asset-based loans, which mean that lenders are mainly concerned with the property’s value and the equity of borrower in the property. If the borrower’s equity is larger, the loan shall be safer for the lenders.
Down payment
The main qualification to obtain hard money loans is having the essential equity or down payment in a property. For residential properties, the minimum amount ranges between 25-30% and for commercial properties, the range is between 30-40%.
Hard money loans with a higher down payment have a great chance of getting approved than a minimum down payment. When the borrower invests a larger amount, the risk is lower for the lender.
• Cash Reserves
Another requirement is having cash reserves for making monthly loan payments and holding costs. The holding costs include taxes, insurance, HOA payments, etc. If the borrower can show a higher amount of cash reserves then there is a greater chance of getting approval for hard money loans.
Borrowers without adequate cash reserves might have a difficult time obtaining hard money loans. In many cases, lenders can enhance the loan amount and use the borrower’s funds for covering taxes, loan payments, insurance, and holding costs. This way lenders shall be assured that all necessary payments shall be met.
These lenders want to work with very strong borrowers. If there are higher chances of borrowers to default on a loan payment, the lenders are exposed to higher risk.
Exit Strategy
Hard money loan lenders want to know about the experience of borrowers in real estate. Borrowers who have many years of experience shall have an easy time to get loan compared to borrowers are trying out for the very first time.
Borrowers who have little experience, hard money lenders will want to gather the detail of the project in details. The assumptions that are made by borrowers should be reasonable such as the exit strategy.
Conclusion
Hard Money loans Houston meet a specific niche, however, when your business is the real estate development, has to act quickly, bad credit, they are a potentially powerful and fast tool. Ensure you know everything in detail before you put your signature and have a planned exit strategy. However, if you find it too risky, you might try out other options.
