The Truth About Hard Money Programs

Pss-s-t, let me tell you the truth about our hard money programs. When starting their inquiry, potential borrowers often ask us about the programs in plural. I also frequently catch myself talking about “programs” as there is a multitude of them. Our hard money programs do not require income documentation, I say. They don’t require income verification. They have no prepayment penalty, etc. The truth of the matter is there are no hard money programs per se. Instead, there is a single program that takes into consideration various aspects of each property and each borrower. I like to say we underwrite holistically. Let me explain what I mean by this.

Typically we are more accustomed to the residential owner-occupied lending terminology. There are many different programs there: Fannie Mae programs, FHA programs, VA programs. In addition, there are low down payment programs. In the pre-mortgage crisis days, there were no-income verification (no-doc) and lite doc programs. Each of those programs has its own strict underwriting criteria that clearly state maximum debt-to-income ratio, minimum credit score and the highest LTV possible. If a borrower does not fit in any of these criteria, they cannot qualify. End of story. If you have three million dollars in the bank, but cannot verify your income – too bad.

The strength of hard money is in its flexibility.

Each borrower and deal has its own strength and weaknesses. We like to say that we fund promising real estate opportunities. The truth is each opportunity has its own strengths and weaknesses. Which opportunity is better: a hundred thousand dollar rehab in Petworth or a fix-and-flip in Laurel with 25K in renovations? Which borrower is stronger: a newbie with a great credit or an experienced rehabber with dings on credit? The singular question our hard money underwriters are trained to answer is: What’s the likelihood of timely repayment of the loan? It’s impossible to answer this questions based on a single aspect of the transaction. That’s the most important difference between traditional and hard money financing. This is also why we offer not a multitude of programs, but one singular hard money program that allows for different borrower and property characteristics.

So what does it mean for those applying for a hard money loan? Try to think as a hard money underwriter when evaluating each investment opportunity that comes your way. Did you get an incredible deal or need to have all the stars align to squeeze 7K in profit? Is it your first time managing a rehab project or are you a grizzled rehabber? Are you pouring your last penny into this project or have enough in reserves to comfortably pay for unexpected costs? In other words, know your own strengths and the strength of the property you are buying. Above all, know your weaknesses and be ready to compensate for them. Think holistically and the chances are you will make a more sound decision each and every time.

Hard money lenders are often referred to as private money lenders. By “private,” we mean that their loans are often offered by smaller-sized companies that actually “own” the funds they are lending. Think about it this way. If you decide to lend funds to your friends and relatives, you will use your own “underwriting criteria” to decide how much you will lend and on what terms. Hard money lenders use the same concept when lending, and their programs vary both based on the strenght of the collateral and the strenght of the borrower. The good news is that this flexibility and common-sense underwriting offer viable alternatives to restrictive banking criteria and equalize the playing field between all-cash offers and those investors who are looking for leverage.