Hard Money Loan Credit Requirements

What are the Hard Money Loan Credit Requirements?

November 18, 2020

Produced by:
Richard Stevens

Richard Stevens is an active real estate investor with over 8 years of industry experience. He specializes in researching topics that appeal to real estate investors and building calculators that can help property investors understand the expected costs and returns when executing real estate deals.

Hard money loans are a great way to secure financing to buy a home fast. They don’t rely on your personal qualifying requirements as much as they rely on the property itself. This makes it easier for borrowers who may not have perfect credit but can afford to buy a home.

Hard money loans are great options for real estate investors, both beginners and experienced investors looking to broaden their portfolios and dabble in real estate investments whether single-family homes or multi-unit properties.

Hard Money Loan Minimum Credit Score Requirements

Even though the emphasis is on the property, not the borrower, hard money lenders still have credit score requirements. This is how they ensure that borrowers are a good fit and have a low likelihood of default.

On average, borrowers need a 600 credit score. Compare that to the average 680 – 700 credit score traditional lenders require and it’s easy to see why hard money loans are a great option.

If you plan to keep the home and rent it out, you may find credit score requirements to be a little higher – usually around 680 only because the risk is higher. You’re keeping the home for a longer period and are responsible for the payments with or without renters.

Other Requirements For Hard Money Lenders

Besides your credit score, hard money lenders look at other personal qualifying requirements including:

Loan-to-value ratio:

Like traditional loans, hard money lenders want you to have some money invested in the property. This decreases the risk of default because most people would do what they could to avoid losing the money they invested. The reason for the loan determines the money you need to be investing. On average expect:

  • 15% investment of a fix and flip’s purchase price or 25% of the after repair value
  • 25% investment in a rental property
  • 25% investment in a refinance

Previous house flipping experience:

Some hard money lenders require you to have experience fixing and flipping houses or as a landlord before they’ll lend to you. They want to know you can handle the ins and outs of real estate. But not all hard money lenders require this – some allow you to borrow funds without any experience. You have to start somewhere right?

Proof you can afford the repayments:

Of course, all borrowers must prove they can afford the repayments. With proof of income, you can get approved in as little as 7 days with some hard money lenders as long as you have the income stability to afford the loan.

How Long Can You Borrow Hard Money Loans?

Hard money loans each have different terms – just like traditional loans. Typically, the terms are shorter, but because you use the loans for investment properties. Fix and flip properties, for example, usually have hard money loan terms of 2 years or less. The longer you hold onto the property, the more it costs you, so selling it quickly works to your advantage.

If you’re buying and holding a property (renting it out) a longer-term is desirable and most lenders offer a 30-year term. This spreads out your payments and enables you to earn a decent monthly cash flow while paying off the debt.

Should You Use A Hard Money Loan?

Hard money loans often have negative annotations, when they help investors in ways other loans can’t. 

Hard money loans may charge slightly higher interest rates, but they provide the funds you need to buy an investment property in as little as 7 days and with fewer headaches and stress because the process is automated and fast!

If you’re looking to buy a home to fix and flip or a home to buy and rent, a hard money loan can be your ticket to investment real estate. If you’re just starting out or trying to find financing to buy a home and invest in real estate, a hard money loan is a perfect way to start!

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