While investing in commercial real estate can be profitable, financing new acquisitions is anything but easy. Financing is especially challenging when investors go the traditional route. Why? Because traditional lending is not well suited to the risk profile that real estate investing usually represents. So investors turn to hard money. Here is the big question: what does an investor need to qualify for a loan?
Hard money is an attractive alternative to traditional financing because it’s fast. Loans can usually be arranged in a couple of days. Lending requirements are also less stringent, so approval is easier to get. But according to Actium Lending out of Salt Lake City, UT, private lenders will not give loans to just anybody. Utah hard money still comes with qualifications.
Here’s how to qualify for a hard money loan:
1. Bring Enough Value to the Table
Banks and credit unions lend based on a borrower’s perceived ability to repay. That’s why they run credit checks and ask for mountains of documentation verifying income and assets. Hard money lenders work differently. They are interested in the value of the property being acquired. That property will back the loan as collateral.
This means the first thing you need to qualify for a hard money loan is value. The property you are hoping to acquire must possess enough value to cover the amount you are asking for. Actium Lending says Utah hard money lenders utilize loan-to-value (LTV) ratios the same way banks do. But their LTVs tend to be lower.
2. Demonstrate Substantial Equity
Equity in a property is the difference between its value and any existing liens against it. Liens or other obligations against a property represent a risk to hard money lenders. Therefore, most lenders require substantial equity.
One way to get around limited equity is to offer a different property as collateral. Say an investor wants to purchase a property that his lender is wary of. Yet another property in his portfolio he owns free and clear, and it generates significant income. He could offer it as collateral instead.
Cross-collateralization is another option. It is the process of combining the equity into two or more properties to satisfy a lender’s requirements. It’s often not the first choice, but it does work when circumstances warrant.
3. Offer a Reasonable Exit Strategy
Hard money lenders require a reasonable exit strategy. An exit strategy is the borrower’s plan for repaying the loan on time. Typically, hard money financing is structured as an interest-only loan. The investor makes monthly interest payments followed by a balloon payment of the principal on its maturity date.
Many lenders also take a look at an investor’s business plan, and his planned use of the funds, in order to see if both are aligned with the exit strategy. If they aren’t, the lender might be hesitant.
4. Demonstrate Some Level of Experience
Although years of experience in real estate investing aren’t mandatory, lenders certainly don’t mind seeing it. At the very least, they hope to see at least some experience in property investing or a related field. Experience demonstrates that a borrower has some idea of what he’s getting himself into.
Of course, borrowers need a certain amount of documentation in addition to these four things. But document requirements for hard money are considerably less compared to traditional banks. Rare is the case when a hard money lender he still seeking documents weeks or months later.
Hard money is a great tool for funding real estate investments in Utah and elsewhere. If you qualify, hard money can help you reach your investment goals.