The 4 Cs of Hard Money Loan Approvals

Hard money lenders (also know as private money, private capital, and bridge lenders) differ from traditional lenders in numerous ways. There are four important factors to keep in mind when applying for a hard money loan to improve your chances of getting approval for your application.

Collateral

Many private money lenders are more interested in using the “quick sale value” of a property as collateral for the loan than the “current fair market value”. Thus, some private lenders ask for appraisals that are generally much more conservative; the valuation estimates the property’s real value if only on the market 6 to 12 months. Full disclosure; Montegra uses the “fair market appraisal value” not the artificially discounted “quick sale value” in its loan underwriting. Almost all hard money lenders limit their loan to value (LTV) to 65 – but the critical question for the prospective borrower is “which value are they using”?  Are they using the “quick sale value” or the “fair market value?”  A quick sale value will end up at something like 60 % of the “fair market value”.  If you don’t understand the difference between these appraisal methods and know clearly which method your private capital lender uses, then you are operating at a great disadvantage. However, private capital lenders are more likely to take future real estate values into consideration than a bank whose hands are tied by government regulations.

Character

Banks and other regulated lenders have to rely on credit scores and income formulas. Hard money lenders have a great deal more flexibility when choosing their borrowers than traditional lenders. They are generally more interested in a borrower’s past experience in real estate and personality traits such as communication skills and reliability than in a black and white credit history.

Capacity

The bridge lender wants to assure themselves that a borrower will be able to pay back, or exit, the loan. Most bridge lenders are not in the property-owning business and do not want to deal with foreclosure procedures or having to unload properties when borrowers default. It is important to show the lender that your timeline is realistic and that you have a loan repayment plan. Keep in mind that hard money loans are usually intended for use as short-term bridges, not long-term solutions. The three most common exit strategies for privately funded loans are: 1) buy, rehab, resell; 2) buy, hold, refinance; or 3) buy, hold, repay with other resources.

Credit

A good credit history isn’t necessarily an absolute requirement for hard money loans. Many private money lenders use the credit history (credit score) as more of a “pricing” tool than a decision making tool.  Banks are normally using a credit score an absolute requirement for approving a commercial real estate loan request.  Because the typical private capital lender is an “asset based lender” instead of a credit based lender the most important single thing is the ratio between the value of the property and the principal amount of the loan (LTV).   However a good credit score doesn’t hurt.  It may be indicative of a borrower’s likeliness and ability to repay their loan. Private capital lenders are often more willing to account for the stories behind any bad credit incidents than a regulated lender who has to answer to the FDIC and OCC regulatory auditors.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.