Going into a hard money deal thinking that getting a loan is easy can set you up for failure. Hard money lenders are certainly more flexible and easier to work with than banks. But hard money is not easy money. Lenders still do everything they can to protect their own interests. They are not looking to give away money to people who cannot afford to borrow.
With that in mind, there are steps borrowers can take to prepare for the application process. Preparation is key. Why? Because it is up to the borrower to convince the lender that he or she is worth the risk. Do that successfully and you are on your way.
Hard Money and Collateral
One of the many things that sets hard money lenders apart from banks is the requirement for collateral. Let’s say you are looking to buy a piece of property in Salt Lake City. You have heard that Actium Partners is a good lender to work with. Understand that Actium is going to require you put up some collateral as security on the loan.
You can prepare by doing your own due diligence. Research the property you intend to buy. Find a way to value it in its current state. Figure out how much it will be worth once you complete renovations. Compare its current and future values against the price you are willing to pay for it. These are all things the lender will look at.
Down Payments and LTV
Rarely is a hard money loan offered without requiring the borrower have some skin in the game. As such, you are going to need a down payment just as if you were borrowing from a bank. You can prepare for the application process by socking away as much cash as you can. Expect your lender to require upwards of 35%. You may be asked to put up more.
Hand-in-hand with your down payment is the loan-to-value (LTV) ratio. Even hard money lenders limit the amount they are willing to loan as a percentage of the property’s value. So put a plan in place to make up any lack of funding through other means should your lender’s LTV be too low.
Develop an Exit Strategy
Another thing you can do to prepare is develop an exit strategy. An exit strategy is a well-conceived plan for paying off the loan on its due date. Do not doubt that hard money lenders look for exit plans. They want to know that borrowers have thought things through. They want to know that borrowers will actually have the cash on hand to make good on the loan.
Exit strategies are second only to collateral in terms of importance. Hard money lenders take both very seriously. In terms of the exit plan though, there is some flexibility. Private lenders are not looking for a strategy they can be comfortable is 100% foolproof. Rather, they just want one that demonstrates that you put some thought into your eventual exit.
Be Ready to Move Quickly
One last thing to note is that hard money lenders move a lot more quickly than banks. They can usually do in weeks what it takes banks months to accomplish. As such, you have to be ready to move quickly when you apply for hard money. An inability to do so could mean you lose the deal.
Remember, hard money isn’t easy money. You still have to put the work in if you want the reward. And the more you are prepared for that work, the better off you will be.
