What does a lender look for when making a hard money loan?

Hard money lenders have the freedom to set their own criteria for loan approval. Banks are under stricter regulatory constraint and have to follow FHA guidelines. Since many distressed properties do not meet FHA guidelines, it can be virtually impossible for residential rehab developers to acquire a traditional bank loan written through Fannie Mae or Freddy Mac.

Hard Money: The Pragmatic Approach

Hard money lenders take a pragmatic approach to loan approval. They assess the proposed business deal and the feasibility of the project, and establish a viable exit strategy to pay off the loan before its maturity date. The decision to approve the loan is based on the property and on the proposed deal; it relies much less on the individual borrower, making hard money loans ideal for someone with a less-than-optimal credit score.

To assess the property, your lender will want to take a look at the value of comparable properties in the area and their projections for growth. Following an estimate of the after-repair value of your property, they will fund an agreed-upon percentage of that value, usually sixty to seventy percent.

Up-front Cash and Quick Refinancing

Hard money lenders generally lend to developers, especially for home rehab projects. The loan structure makes it ideal for someone who has the cash up-front to be able to pay thirty to forty percent of the loan down, and the higher interest rates compared to conventional lending are suited to someone who is going to be reselling the property or seeking out a second mortgage from a conventional lender relatively quickly.

Conventional Lending

The easy approval process with hard money loans helps developers sidestep some of the barriers that can keep a project from getting started. For example, conventional lenders that go through Fannie Mae or Freddy Mac approve a loan based on a completely different state of criteria:

  • credit score
  • age of credit history
  • debt-to-income ratio
  • payment history
  • capacity (the ability of the loan applicant to pay off your loan by the maturity date
    • conditions
    • capital
    • collateral


Getting your Development Off the Ground

Real estate developers and home rehabbers choose hard money because the market doesn’t wait. When the opportunity presents itself and you’re ready to get your project into the construction phase, a hard money loan gets you the cash straightaway, pending a fair assessment of the business deal.

Socotra Capital is California’s premier hard money lender for your real estate investment needs. Contact us today to get started on your quick approval!