When we talk of hard money, what is implied? A brick and mortar asset such as a building, home, or business premises is provided as collateral. Hard money lenders shy away from startups and want people with a proven track record. Many people think hard money lenders are the easiest source of seed money or funding to start up a new business line. This perception of thought is misinformed.
The main reasons for rejecting a loan can be summarized as follows:
- Primary Residence. The property that we are financing cannot be your primary residence. This is a regulatory issue and hard money lenders are not licensed to do consumer loans in the form of first-time mortgage borrowers.
- Loan-to-Value (LTV).
a) One of the main reasons why a hard money loan will be refused is because the client has no skin in the game. The LTV on the property may be at 70%, however, all the monies are coming from equity, with no cash input from the borrower, yet the loan is a fix-and-flip.
b) When the LTV is not adequate even after considering walk-in equity and cash availed by borrowers, most hard money lenders need LTV of at least 70%.
- “Location Location Location.” With the security availed being the source of loan repayment, many hard money lenders want to know the state of the property. Whether it is income-generating or not location determines the property salability as well as the loan amount vis-à-vis the market value of the property.
- Late Mortgage Payments. Many hard money lenders tend not to worry about one’s ability to service their monthly payments, however, they derive value in knowing one’s track record in terms of properties flipped in the past and to some extent their repayment history. Late mortgage payments are frowned upon in the lending industry generally.
- Exit Strategy. This must be clear as hard money funds are short term, usually ranging between 6-24 months.
a) Refinancing via a conventional loan is common. Loans being on-boarded from other hard money lenders tend to struggle and are often rejected.
b) Most hard money lenders plan on reselling the subject property; After Resale Value (ARV) vs purchase price and input costs must, therefore, bring a profitable return.
c) Comparable properties (Comps) play a huge role in determining ARV and/or after the completed value. Understanding the margin of risk in the event the borrower is unable to sell or refi the lender can foreclose and still meet foreclosure costs and recover their monies.
- Capital Availability. Due to the COVID-19 pandemic, many hard money lenders have faced hardships in sourcing for capital to stay afloat and some loans have been rejected due to timing. Such applicants need to have their applications reviewed now that the market is HOT. Plus, as always, there is no prepayment penalty, giving you more control of your projects.
At Pacific Equity and Loan, we offer options, convenience, and flexibility rolled up into one easy process for you to continue to grow. And don’t forget our Lakewood team is always here to help.
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3620 100th St SW
Lakewood, WA 98499
Federal Way, WA
33801 1st Way South
Federal Way, Wa 98003