Our guide reviews the four key factors you should meet to qualify for hard money loans.
Hard money loans refer to any financing secured by a hard asset such as real estate. Unlike conventional bank loans, which are underwritten on the borrower's financial profile, hard money lenders consider the value of the real estate itself and its ability to turn a profit.
This means borrowers don't need to submit income verification or tax returns when applying, and they don't have to worry about their debt-to-income ratio being too high.
At Constitution Lending, our four main considerations for buyers are:
In this guide, we review these four requirements in more detail. Then, we cover how hard money loans work and how to apply for one. We also discuss what sets us, Constitution Lending, apart from other hard money lenders.
You can see what loan terms you qualify for using our automated loan pricer.
Hard money lenders typically finance between 60% and 85% of the property's current value, and the borrower must cover the remaining amount as a down payment.
Here are some additional requirements:
As mentioned earlier, hard money lenders finance a percentage of the property's asking price at closing but they do not fund the full renovation loan.
Instead, borrowers must submit a detailed scope of work and construction budget from a licensed contractor detailing the planned renovations. Once the lender approves the scope of work and construction budget, they fund the renovation loan as the borrower completes the renovations.
For example, if the borrower wants to install an HVAC system, they must complete the installation before the lender pays the quoted amount.
This process requires borrowers to have cash reserves to cover portions of the renovation, which is why hard money lenders want to see bank statements as proof of reserves.
Generally speaking, borrowers should have cash reserves equivalent to three months’ worth of loan payments.
This factor won’t apply to bridge loans; however, if you’re using hard money loans for fix and flip projects, lenders will evaluate the loan amount compared to the property’s after-repair value, also known as the after-repair LTV.
The lower the after-repair LTV, the better loan terms borrowers qualify for and the more exceptions lenders are willing to make to close the loan.
So, before approaching a hard money lender, you should know the property’s estimated after-repair value. Here’s how to do that:
As we’ll touch on below, you need to submit these documents (scope of work, construction budget, and appraiser report) to the lender when applying, and the lender will evaluate them to determine your eligibility.
The fourth factor we consider when evaluating loan applications is a borrower’s credit score. Our minimum credit score requirement is 660; however, other lenders may have stricter criteria and only issue loans to borrowers with a credit score of 700 or higher.
A question you may have is: If hard money lenders focus on the real estate backing the loan and not the borrower’s finances, why does creditworthiness matter?
Creditworthiness is important because successfully fixing and flipping a property requires significant financial responsibility and real estate knowledge. While a borrower’s experience level is a good indicator of their real estate expertise (more on this later), credit scores reflect a borrower’s financial discipline and ability to manage debt.
If a borrower’s credit history shows they’ve been making mortgage and credit card payments on time for the past five years, for example, it indicates a track record of managing debt responsibly, making them more likely to handle a fix and flip successfully.
On the other hand, if a borrower cannot make timely monthly payments on a few thousand dollars of credit card debt, it’s unlikely they will be able to pay off a $300,000 fix-and-flip loan.
Hard money lenders view experienced borrowers as less likely to default because they've successfully flipped multiple rental properties. Due to this reduced risk, they may offer easier and faster application and approval processes, higher LTV loans, and lower interest rates.
If you have never flipped a property before and you meet the four requirements mentioned above, you can still qualify. However, lenders will probably give you lower LTV and higher interest rate loan options to accommodate the additional risk.
With Constitution Lending, although having real estate experience can help you qualify for more favorable loan terms, it isn't necessary. In fact, we've helped countless first-time real estate investors successfully fix and flip properties without relying on traditional mortgage lenders.
Read more: 5 Best Fix and Flip Lenders (2024 Reviews)
To apply for a hard money loan with Constitution Lending, use our automated loan pricer to see what hard money loan rates you qualify for.
You can plug in a couple of details, such as the value of the property you want to purchase or refinance, the after-repair value, and the renovation budget, and the pricer will give you three quotes outlining your interest rates, monthly repayments, closing costs, origination fees, and buydowns.
You can apply for one of the three loan options by selecting it and entering your email address and full name. We’ll email you a term sheet and pre-approval letter within a few hours.
In addition, we’ll send over access to our documents portal, where you can submit your scope of work, construction budget, appraisal report, and other documents. This documents portal is also where you can message your loan officer with questions and keep track of your application’s progress. This prevents the frustrating back-and-forth where lenders always request additional documentation in batches.
Once you’ve submitted the required documents, we underwrite your loan and close within 7 to 14 days. On some occasions, we’ve even closed within four days.
The two biggest and most common problems house flippers face when working with hard money lenders is that the lender takes too long to close and sometimes rejects the application right before the closing date.
To avoid these problems, you should consider the following factors when choosing a hard money lender:
Most hard money lenders say they can close within 14 days; however, once you begin the application process, you quickly realize that closing can take up to 30 days.
We encountered this issue personally while investing in real estate and found that an effective way to gauge a lender’s closing speed is by considering:
Based on our experience, if you have to schedule an hour-long phone call with a loan officer just to get a quote, and they take more than 24 hours to approve your loan and give you a term sheet, then it’s unlikely things will speed up when you get to closing.
The fastest lenders allow you to generate multiple instant quotes on their website without speaking with a mortgage loan officer, and they deliver term sheets and pre-approval letters within hours.
Another common problem private investors face (including us before we started Constitution Lending) is that loan officers initially approve their application, but lenders reject it right before closing.
This often occurs due to brokers who don’t fully understand lender requirements. These brokers aren’t lending their own money; they are merely connecting you with an actual lender.
Because these brokers work with various lenders and financial institutions and don't have a thorough understanding of each one’s specific requirements, they are unable to tell if you qualify by simply reviewing your documents. They have to pass your application to the lender for underwriting (which usually takes two to three weeks) and hope that everything goes well. However, if the lender finds a discrepancy that the broker didn't know about, it can cause frustrating last-minute rejections.
With private lenders like Constitution Lending, we know what requirements borrowers must meet to qualify (since we're lending you our capital and we create our own requirements). We can give you a concrete answer on your likelihood of qualification within a few hours of you submitting documents via our portal. If we approve your application at this stage, it's highly likely that your loan will close successfully.
Alternatively, if there are issues with your application — such as an insufficient ratio between the property's as-is value and after-repair value — we can let you know immediately. This way, you can focus on finding another investment property instead of waiting around only to get rejected at the last minute.
If you’re tired of traditional loans and you’re looking for financing options that look at the value of the property and not your income and debt-to-income ratio, use our automated pricer to generate an instant quote.
Related reads:
| Qualification | Requirement |
|---|---|
| Minimum and maximum loan amount | $150,000 to $3,000,000 |
| Type of property | Non-owner occupied single-family, multi-family, and 5-8 unit properties |