What Hard Money Lenders Look For
Real estate investors are always on the lookout for new opportunities. They know that when a potential project is found, many times it’s how quickly the investor can come up with the financing. Investors like to keep as liquid as possible in order to have cash on hand for the next deal. Real estate agents and sellers alike know that cash is king so keeping some on hand is critical to their success. Yet those very same investors know that sometimes an opportunity finds them, not the other way around. And when it does, there may not be enough free cash in the bank in order to make an offer. That’s why real estate investors establish a relationship with a lender that offers hard money loans in addition to traditional financing. Yet hard money loans are approved in a different manner with different goals in mind.
Consider a traditional, 30 year investor property loan. Such loans are typically underwritten to Fannie Mae or Freddie Mac guidelines. Why? Because direct lenders profit from the sale of these loans to Fannie, Freddie or to other mortgage bankers. As long as the loan was approved using these guidelines the loan is eligible for sale. Direct lenders fund loans using a previously established line of credit. When a loan is approved and funded, selling the loan means replenishing the credit line enabling the lender to continue making more loans.
A hard money loan on the other hand sees the real estate investment landscape a bit differently. Hard money loans are approved internally without respect to any external, third party guidelines. Fannie Mae and Freddie Mac rules don’t apply. Instead, the lender makes the decision whether or not to finance a project. There is no sale in the secondary markets to Fannie or Freddie. Instead, the hard money loan is paid off once the project is completed and the real estate investor pays off the note at the sale or replaces the hard money loan with traditional financing.
A hard money loan doesn’t pay any attention to any secondary market but whether or not the lender makes the determination that the project makes sense and the loan will be paid off once the repairs have been made. For example, an investor finds a duplex that has been abandoned for several months and the owners can’t rent or sell it due to its condition. The investor, along with a contractor, visits the property and makes a thorough inspection noting what needs to be rehabilitated, how much that will cost and how long it will take to make the needed improvements.
The lender will then review the request and order an appraisal report. The appraisal will review and compare the property as if the repairs have been completed and determine a final value. If the lender finds the sale of the property will pay off the hard money loan plus closing costs, the loan can be approved.