Can Anyone Get a Hard Money Loan?
The internet is rife with misinformation about hard money loans. Just run a search on the term and you’ll see for yourself. People have a lot of opinions about hard money that just do not line up with reality. For example, it is commonly believed that anyone can get a hard money loan for any reason. This is just not true.
There is little arguing the fact that hard money lenders are not regulated as stringently as banks. It is also true that their asset-based lending model makes it easier for them to lend to people that banks and credit unions will not touch. But that does not mean lenders will dole out money to anyone with an outstretched hand. They have their standards. They have to, or they would go broke.
Lending Based on Assets
Hard money is considered asset-based lending because approval decisions are made based on borrower assets. By contrast, banks and credit unions lend on the good faith and credit model. That’s why application and approval for both types of lending are so drastically different.
Apply for a loan from a bank or credit union and you will have to provide reams of documentation proving your current financial situation and ability to repay. The lender will look into every detail of your financial past. They will check your credit history and rating, as well. Only if they are satisfied with what they see will they offer you a loan. And even at that, your rates and terms will be dependent on how good your credit is.
Hard money lenders don’t care about any of that stuff. They care about your assets. Imagine a real estate investor who applies with Salt Lake City’s Actium Partners for a loan to buy a new piece of property. Actium is most interested in that property. Why? Because the property is the very asset the borrower will offer as collateral. The property becomes the security for the loan.
Property Values Rule
In the hard money game, assets offered as collateral are what secure loans. More often than not, the asset is real estate. This dictates that property values rule the day in the hard money arena. Any attempt to borrow requires having a piece of property (or buying one) valuable enough to cover the lender’s risk.
Hard money lenders work on loan-to-value (LTV) ratios, just like banks. Let us assume a fictional 75% LTV for an equally fictional Acme Hard Money, Inc. The best you could get from Acme on a $100,000 piece of property would be $75,000. You would have to come up with the balance some other way. You would also have to pay fees and charges out-of-pocket.
Here is the thing: Acme’s appraisers have to value the property at more than $75,000 in order for you to be approved. In all likelihood, the lender would probably be looking at a value of closer to $100,000, just to cover the potential costs of having to seize the property and sell it in the event of your default.
No Asset, No Loan
No, hard money lenders will not lend to anyone and everyone. The asset issue explains why. You cannot borrow if you do not have an asset to back up the loan. And even if you have an asset, you must have a reasonable exit plan. You must be able to pay back the loan in a relatively short time. You are not going to get a hard money loan with a 30-year term.
Can anyone get a hard money loan? No. It is unfortunate that so many online posts say otherwise.