Among the many myths associated with hard money lending is that it is ‘no standard’ lending. In other words, some people believe that hard money lenders have little to no standards. They will lend to just about anybody who knocks on the door. But nothing could be further from the truth. Hard money has different standards. But the industry still has standards, nonetheless.
It is true that hard money lenders, like Actium Lending out of Salt Lake City, Utah, do not run credit checks and examine pay stubs before approving a loan. They don’t look around every corner and turn up every rock to verify a lender’s ability to repay. But Actium also doesn’t dish out money like candy. They protect themselves by applying standards that are far different from those applied by conventional lenders.
Core Underwriting Standards for Hard Money
Hard-money lenders are free to do business as they see fit. As private lenders, they aren’t pigeon-holed like conventional banks are. That said, there are four core underwriting standards nearly all hard money lenders follow:
- Equity and LTV Discipline – Lenders require that borrowers have significant skin in the game. They tend to offer lower loan-to-value (LTV) ratios that require higher down payments and at least some equity.
- Exit Strategies – Hard money loans are almost always tied to solid exit strategies. Lenders want to know how borrowers are going to exit their loans. They need to be reasonably assured that exit plans will work.
- Financial Reserves – Even though hard money lenders do not look at pay stubs and income/loss statements, they still need to be reasonably assured that a borrower’s financials are in order. They often look at financial reserves to verify loan serviceability.
- Asset Value – Perhaps the most important of all is the value of the asset being obtained. Underwriting decisions are based primarily on it. If the value isn’t there, a loan won’t be approved.
Hard money’s core underwriting standards are far less demanding compared the conventional lending. So it should be no surprise that hard money loans are easier to come by when conditions are not just right. But this by no means suggests that hard money lenders are careless. They aren’t.
Other Things to Consider
A hard money lender’s standards can be flexible in other areas as long as the core standards are met. Take credit score and history. A typical hard money lender will not consider either one for approval purposes. But a soft credit check may be conducted after approval is given. A credit check will partially influence the rates that lender is willing to offer. Borrowers with better scores and histories get more favorable rates and terms.
In terms of documentation, hard money lenders will definitely ask for identity documentation and documents relating to the property being acquired. Some may ask for bank statements, insurance records, and documentation confirming how the property will be used.
Most lenders let borrowers know up front what types of documents are necessary. Compared to what conventional lenders require, hard money lenders don’t need much at all. If a borrower can furnish all documentation upfront, the underwriting and funding process tends to be very simple. Loans can be approved within hours and funded within days.
Do not believe the myth that hard money lenders have no standards. They are not willing to lend to anyone who walks through the door. They have standards. It is just that their standards are different from what conventional lenders require. Their standards are designed to protect them from bad loans that would ultimately harm them. They are reasonable and necessary standards.
