Understanding hard money loan requirements is the first step in finding the right lender for you!
Before you get started on your fix and flip, you need to know a few things:
What does your lender look for?
What do you need to know about each project before applying for a hard money loan?
The more you know, the better deal you’ll be able to find.
What Do Hard Money Lenders Look For?
Lenders look at a lot of things when determining deals. It’s important to have details for each piece of your project so you can make sure there aren’t any delays in your work.
ARV (After Repair Value) is a critical component when calculating a hard money loan.
Hard money lenders look at the projected value of your property. By looking at comparable properties (comps), lenders estimate the projected value based on the work you plan to complete.
Scope of Work and Budget
Similarly, lenders look at the scope of the work you plan to put into your project.
What renovations are you planning? What is your budget? Having clear answers to these questions helps the lender determine what exactly you’re going to need to put into the project in order to have a higher ARV.
Your lender will also look at the purpose of the project. What is your ultimate goal? This lets lenders estimate the profits and the LTVs when you’re figuring out a deal.
You need to have an exit strategy. Are you selling, refinancing, something else?
Having a clear exit strategy demonstrates your ability to manage the project well and follow through with generating returns.
Specific Loan Amounts
How much are you looking to borrow? Do you want the full amount or just partial?
If you can put some of your own money into the project, you’ll need a clear idea of how much of that goes towards the purchase price vs. renovation costs.
Since timing is so important in keeping your project moving, you want to know upfront if you’re putting your own money in escrow for repairs or relying on hard money loans for those costs.
How long is your project going to take? The longer the project takes, the more important it is to buy lower to ensure you’re able to have higher profit margins so you can pay back your loan.
Interest, taxes, insurance, and even HOA fees add up every month you hold your loan and work on your project.
The faster you can turn your project into something that is making you money, the less risky you are as a borrower.
Hard Money Loans: Profit Expectations
Ultimately, estimating profit revolves around three things:
- ARV (After Repair Value)
- Purchase Price
- Renovation Costs
Lenders typically max out at 70% to 75% of the ARV, but LTVs (Loan to Value) can also affect those numbers.
If you estimate your ARV early on, you can calculate what money you have to put into the project before sending it to lenders. This lets you propose a more detailed plan which can help you find a better deal.
You can use this free tool to help you calculate those amounts quickly and easily.
Does Your Project Meet the Requirements?
We want to make sure your project is profitable and able to meet hard money loan requirements.
If you have a deal you want us to look at, we’re more than happy to help! You can always reach out to us at Info@HardMoneyMike.com.
You can also check out our YouTube channel for more information about how to successfully navigate your fix and flips.