Picking the right hard money lender can make your next deal faster, easier, and headache-free. What should you be asking them?
When you’re ready for your first hard money loan, the number of options out there for lenders is staggering. You’ll probably come across at least a dozen on your first Google search that all seem credible, but are they really?
Unfortunately, for every credible hard money lender, there are at least half a dozen that are just looking to take your money (or worse, your investment property), so you need to weed out the scammers to save yourself a massive headache. But how do you know what to look for in a suitable lender?
That’s what I’m going to cover here with you. I’ve been in this business since I was 20, so believe me when I say I know what answers you need to look for when interviewing a potential lender. Here are ten critical but easy questions you need to ask every time you’re ready to look for a hard money loan to fund your real estate investment.
What’s a Hard Money Loan?
First, let me make sure we’re all on the same page here by defining what a hard money loan is and is not.
Hard money loans were created specifically for the real estate investment industry and are short-term, high-interest loans that investors use to fund fix & flip or BRRR properties. These loans rarely require the same things as a mortgage would like high credit scores, steady employment, or no criminal records.
Instead, they’re secured by the title of the property. Your lender will take a first position on the title until the loan is paid off in full. If, God forbid, you can’t pay it back, then the lender takes ownership of the property. However, as long as you have a solid plan behind your fix & flip and keep communication open with your lender, losing the property is rare.
Hard money loans typically run for a term of three years or so, with the longest probably being around five years (depends on your lender). Investors will either pay these back with the profits made from the sale of a fix & flip or the refinancing of a mortgage if it’s a BRRR loan.
While the amount of money you can get with a hard money loan is substantial, it is NOT a mortgage and should never be used to buy your personal residence. In all honesty, the interest and timeline that go along with hard money loans just make using them as a replacement for a mortgage a terrible idea.
10 Critical Questions to Ask Your Potential Hard Money Lender Before Applying for a Loan
Doing your due diligence with potential lenders is just as critical as the due diligence you do on an investment property. Remember that you’re looking for a lender that’s in it for the long haul with you, so screen them accordingly.
If you’re not sure how to screen lenders, use these ten questions to help gauge whether they’re the right lender for you.
What Minimum Credit Score Do I Need?
What their answer tells you: Hard money loan applications rarely require the things a traditional loan application would, such as your income statements or detailed credit reports. The reason, if you’re curious, is because your loan is based more on the potential value of the property instead of your personal financial history.
Since your credit history isn’t as big of a deal to hard money lenders as it is a traditional bank, your credit score doesn’t have to be as high as you think. Here are the minimum scores the top lenders require you to have:
|Company||Minimum Credit Score Required|
|Do Hard Money||none|
Does DoHardMoney really not require any minimum credit score? Yep! We’re more interested in working with investors that can do the right rehabs than those with stellar credit. Your past mistakes shouldn’t prevent you from moving forward and getting the funding you need, and our clients’ track records with successful flips show us that credit scores miss the mark more often than not.
What Minimum Down Payment Should I Expect to Give?
What their answer tells you: DoHardMoney has $0 minimum down payment requirements for direct loans and $7,000 – $10,000 for partner loans, but we’re the exception and not the standard. Down payments will vary, but for hard money loans, you should expect to see a requirement of 20% – 25% down (unless you use us, of course!).
Do You Work with New Investors?
What their answer tells you: Not all hard money lenders are interested in funding loans to new investors due to the risk involved. If you’re a new investor, this should be one of the first questions you ask to save yourself some time.
Which lenders will work with first-time investors? Here’s a breakdown of the top hard money lenders and their new investor requirements.
|Do Hard Money||none|
|RCN Capital||Two successful flips or have owned two rental properties within the past 36 months|
|Lending Home||0-5 successful flips in 24 months|
|Lending One||At least one successfully completed investment|
|Athas Capital||None listed|
|Anchor Loans||Five successful flips within the past 18 months|
|Lima One||None listed|
Does It Matter How Much of This Loan I Spend on Repairs?
What their answer tells you: Some lenders will stipulate that only a certain percentage of your loan can be used to fund either the purchase of the property or the rehab costs. What you’ll typically see in your loan terms during the application process is an itemized work list requirement that shows how the loan will be used and where that money is going. You’ll also most likely need to submit your list of contractors or service professionals because most lenders will only fund loans that are used to pay for work done by licensed contractors. Unfortunately, though you might be handy, your lender will want the job done by licensed, bonded professionals to ensure everything gets done correctly and that someone is liable should the worst happen.
Do You Provide Mentoring or Help for Your Clients?
What their answer tells you: Okay, so this is more of a bonus question, but it is a great one to ask when you’re deciding between two potential lenders. If I can talk DoHardMoney up for a moment, we’re one of the few lenders out there that takes the initiative to ensure you have all the help you need to succeed. It’s our goal to ensure that your fix & flip is profitable so that you’ll come back for your next loan, and going the extra mile for our clients just seems like a reasonable thing to do.
A good lender will offer you additional tools or services along with your loan. We, for example, have your scope of work checked by an experienced construction project manager. Their job is to help every one of our clients get the best estimates possible and create realistic timelines for every fix & flip we fund. No one wins when you’re out of time or money, so look for a lender that understands this and takes every step possible to hedge your bets and create a successful (and profitable) partnership.
Can I See How Much You Charge in Closing Costs?
What their answer tells you: Closing costs will most likely have a range to them that’s finalized once your application is submitted, so don’t worry if there isn’t a hard number given. However, you should be able to receive at least a range of percentages ahead of time, even if it’s just a rough estimate. If your potential lender dodges the question or hems and haws about those numbers, I’d recommend getting out of that office ASAP.
Will My Loan Be Different Depending on Where I Do Business?
What their answer tells you: Hard money lenders are rarely able to work nationwide due to each state having its own laws and regulations around money lending. It also matters if your business location is in a different state than the investment property. So say you have an LLC that’s registered in Delaware but plan to purchase a fix & flip property in New York. That might make a big difference between what fees and terms you’re eligible for or if the hard money lender can work with you at all. Be upfront with any cross-state business deals you’re planning to do, and check first to see if your potential lender has any additional regulations you need to worry about.
How Much Will I Pay if I Pay the Loan Off Early?
What their answer tells you: Pre-payment penalties are often a stipulation for big loans like hard money or mortgages. Typically a pre-payment penalty only kicks in if a loan is paid off within the first few months of funding.
It probably sounds unfair to be penalized for getting out of debt earlier than you thought, but the earlier you pay off a loan, the less interest gets accrued. While that’s definitely a win for you, that loss of income messes with your lender’s revenue projections, and that revenue is typically used to fund other investors’ loans.
A pre-payment penalty helps rebalance their revenue, so there’s more money to go around, but this isn’t a fee every lender has, so get the details ahead of time before applying and add that into your cost projections.
How Much Will You Fund?
What their answer tells you: Hard money lenders typically fund loans based on the After Repair Value, or “ARV,” instead of the current appraisal. Not only will this increase in funding allow you to have more money in your repair budget, but it can give you more confidence that you’re making a worthwhile investment in this real estate purchase.
Here are how the top hard money lenders compare when it comes to how much of a loan they’ll fund:
|Company||Amount They’ll Fund|
|Do Hard Money||100%, up to $350,000|
|RCN Capital||80%, Up to $5 million|
|VisioLending||Up to $2 million|
|Lending Home||Up to $3 million|
|Lending One||Up to 90% of purchases and repairs|
|Athas Capital||Up to $2 million|
|Abl1.net||Up to $2.5 million|
|Anchor Loans||Up to $10 million|
When Do I Need to Start Paying Back the Loan?
What their answer tells you: Not every hard money lender requires immediate payment; some will have a grace period that allows you to focus your effort more on getting your fix & flip ready to be shown than adding the extra stress of making your loan payments. Ideally, your lender should have some kind of grace period established that allows you to hold off on paying back your loan for the first few months or until the property is sold.
When you’re a real estate investor, capital is key. Having a hard money lender on your team that’s there for the long term can make getting that necessary capital much easier, but you need to do your homework first to ensure you’ve got the right lender for your situation. Start with these ten questions to get the conversation going but listen to your gut and don’t be afraid to ask for more information or walk away if it doesn’t feel right.