As banks and institutional lenders cut back on the financing they offer for commercial and investment real estate purchases, hard money lenders are playing an increasingly important role in today’s lending market. Private capital lenders are often more willing and able than their traditional counterparts to provide short-term loans for investment properties (both commercial and non-owner-occupied residential) in less time and with a lot less red tape. The new Federal guidelines requiring banks to look at the “global financial picture” of their borrowers is creating incredible headaches for both the bank and the borrower.

While private money lenders (also called bridge lenders) do not have the strict requirements that banks must follow, there are still important factors that they consider before approving a borrower’s loan request. Making yourself aware of these factors as a borrower can make your loan requests more likely to succeed. Here are three main factors that most lenders take into account when deciding which loan requests to ultimately finance:

1. The borrower’s collateral: Since hard money loans are underwritten as asset-based loans in contrast to the banks cash flow and credit based underwriting standards, the property that will secure your loan is of paramount importance.  Lenders want assurances that their investment (your loan) will be repaid, so they will want to have a clear understanding of the potential property’s value and marketability. Though hard money lenders want to be assured that they will recoup the money they lend out, reputable lenders do not actually want to own properties and would much prefer to lend to borrowers who will repay loans rather than default and force them to go through foreclosure proceedings.
2. The borrower’s experience: Hard money lenders want to know that a borrower has experience in the market in which they are investing and that they are willing to invest the time necessary to succeed in it. You can demonstrate your experience and knowledge by providing a well-crafted business plan with a detailed budget and at least one proposed exit strategy. This does not mean that they will not lend to novice investors, but those with less experience should consider putting together a team of more experienced investors to work with or have someone with more experience mentor them to show the lender that they are willing to learn and have resources to do so at their disposal.
3. The borrower’s credit: While hard money lenders do not have the rigid credit score requirements as banks and institutional lenders do, they will still want to know about your credit history in order to assess the risk level of your loan request and possibly to determine the interest rate and fees on the loan. Hard money lenders will finance loans for borrowers with bad credit, sometimes even if they have foreclosures on their history. Unlike banks, hard money lenders are willing listen to the stories behind the bad credit scores/history and to give borrowers a second chance.

Hard money lenders provide funds on higher risk real estate investments that enable borrowers to revitalize properties, create jobs, and, by extension, contribute to the overall health of the economy, thus ensuring that both lender and borrower profit from the partnership.