How to Get Pre-Approved for a Hard Money Loan

Let’s talk about something that is near and dear to every real estate investor looking for leverage: how to get pre-approved for a hard money loan. Private money lenders are different from traditional lenders such as banks and credit unions, and they look at very different criteria. You need to know what these criteria are before you start shopping for a hard money loan and be ready to present yourself in the best possible light.

Transaction Profitability

Private lenders are often referred to as asset-based lenders. It is because they focus heavily on collateral, i.e. an investment property that secures a hard money loan. A hard money lender would want to know how much you are willing to pay for the property, how complex and extensive your renovation is, and last but not least the expected after-repair value of the property. These numbers are important because the determine how profitable the overall transaction is. If you are not making reasonable profit, it is unlikely that you will be pre-approved for a hard money loan.

Borrower’s Strength

Of course, many real estate investors looking to get pre-approved for a hard money loan don’t have a particular property in mind. They are just looking to find out how much they can qualify in general, so they can limit their search to the properties within a particular price range. If this is the case with you, a private lender will focus on the criteria that determines your strength as a real estate investor.

For us at New Funding Resources, “borrower’s strength” is typically comprised of these three aspects.

Financial Resources:

To get pre-approved for a hard money loan, be prepared to talk about your financials.  Private money lenders provide unique leverage to buy and rehab properties, but they also manage their risk by requiring their borrowers to invest some of their own funds in the transaction.  We call such contribution “skin in the game.” The financial contribution requirements are typically determined by the lender’s underwriting criteria and the pariculars of each transaction.  However, in general, the higher the price of your property and the more extensive your renovations, the more you will be asked to contribute to the transaction. 

Think carefully about what you would feel comfortable investing in real estate in this particular moment of your life. If you have partners, talk to them about the maximum contribution they will be comfortable with. Bear in mind, that it will be unwise to invest everything you have in one transaction. First, you don’t want to put all your eggs in one basket. Second, you want to make sure that you have enought money left on your account to make the monthly payments on your hard money loan and meet any anticipated renovation expenses. To get pre-approved for a hard money loan with us, you would need at least $7K to $10K in reserves. Your can read more about the role of reserves in private lending here.

Real Estate Experience:

Tell us why you want to be a real estate investor and what qualifications you have.  If you are a first-time real estate investor, be prepared to talk about what other experiences or skills you have to help you succeed. For example, are you a homeowner? Do you have construction experience?  Have your rehabbed properties for someone else?  Are you a real estate agent who’s been working with real estate investors and now want to invest for yourself?  You might have not flipped a property before, but need to have at least some qualifications to succeed as a real estate investor.

If you have direct real estate experiene flipping homes, be prepared to prove it. A private lender would eventually want to verify that you took possession of the property either in your personal name or in the name of the LLC your are member of. Typically, it can be easily done by checking tax records or MLS. If such information is not available, be prepared to show the documents with your name on them, such as the deed.

Character:

You need to demonstrate that you’re a responsible person who makes his best effort to pay his obligations. We are not requiring perfection and are not score driven when it comes to your credit history. However, if you have dings on your credit, especially on your mortgages, be prepared to explain what happened and why you are in a different situation now.  Common sense suggests that it’s not the best idea to shop for an investment loan while be behind on other mortgages or while in bankruptcy.

Your financial stability is an indicator of the overall financial discipline and history of good money management.  It bodes well for the success of your next real estate venture giving your private lender more reasons to approve your loan. There are, however, some other factors, that might influence your getting pre-approved for a private loan and building a succesful relationship with a hard money lender. While they might not help you get pre-approved for a hard money loan, they can make the process of getting pre-approval less smooth.

Factors That Can Negatively Affect Your Hard Money Pre-Approval Process

Not Being Responsive:

We love working with borrowers who thrive in a challenging environment. What these borrowers might lack in experience or resources, they compensate in perseverance and determination. When applying for a hard money loan, show your lender that you have a fire in the belly.  We are often asked how fast we can get you pre-approved for a hard money loan or how fast we can close it.  The answer is “fast”, but not if the borrower dilly-dallies on his or her end.  Be responsive when a lender asks for documents. Show organization and thoroughness when supplying contracts and estimates.

Investing in Your Personal Name:

A hard money loan is a loan issued for commercial or business purposes. Many private lenders require their borrowers to do business as a limited liability company (LLC). Though we can make some exceptions and get you pre-approved for a hard money loan without it, our strong recommendation is that you avoid doing business in your personal name. Why? Because it offers significant protections for the real estate investor and, by extension for their lender. 

Starting the Initial Conversation off the Wrong Foot

The intangible aspect of the transaction is how a private lender feels about a particular borrower. Remember, private lenders lend their own funds and often have a descretion to decide whom to lend to. That initial conversation with a private lender sets the tone for the future relationship and might affect you getting pre-approved for a hard money loan. Being arrogant, combative, hiding information, or sounding desperate for a finacial break, might give a lender a pause. Read more about these intangible aspects in our articing about how not to how not to start conversation with a private lender.

Hard Money Proof of Funds Letter: The Ultimate Proof

Hard money pre-approval process culminates in a lender issuing a Proof of Funds letter. The letter is issued for a certain amount but is not property-specific. It simply lets other parties (such real estate agents and sellers) that this borrower has access to certain amount of funds to purchase a property. Our article of hard money proof of funds can provide you with more details of what it is and how to best use it.

If you don’t qualify for a hard money loan, a lender should explain to you why. At New Funding Resources, when we have to turn a prospective borrower down, we do our best to show them a future path towards pre-approval. Most often, it includes accumulating a more substantial nest egg to qualify for a hard money loan while educating yourself on the intricacies of real estate investing in the DMV area. We believe that we the right mind, perseverance, financial discipline, anyone can eventually become a successful real estate investor. We are here to help lower the entry barries to this lucrative arena.

Looking to get pre-approved for a hard money loan in Maryland, Virginia, or Washington, DC? Contact New Funding Resources at 240-436-2340 today and start making offer tomorrow.