While it is more challenging for those with low credit scores to get loans, it is still possible. If you have plenty of money but have a lousy credit score, then you can opt to get a hard money loan instead. Through it, lenders can protect themselves by asking for collateral—which is usually property that the borrower owns. In this case, the borrower is not borrowing as an individual—rather, they become an entity!
Regardless of what you end up doing with the loan, it is one of the fastest and most flexible types of loans you can have options for. However, before you can get one, you must qualify for one.
In this article, we will tell you exactly what the lender considers when deciding whether or not you are eligible.
1. Equity and LTV
Some of the initial things that a lender considers when determining your qualifications are your equity and loan-to-value. Equity is the difference between the market value of your home and what you will owe, while loan-to-value is the percentage of the loan you are borrowing against the market value of the house.
If the lender finds that you are trying to borrow with an LTV of 60 percent or higher, then it is highly likely that they will not give you the money! For that reason, you will need to buy a home with immediate equity to allow you to borrow at better terms with higher chances of getting approved. Otherwise, you can also opt to shell out a downpayment—however, take note that this will cost you about 30 to 40% of the loan’s total amount!
Another consideration a lender will make is the collateral that can be used to safeguard the lender. In most cases, this happens when you do not have the money to put in, which—as mentioned earlier—is around 40 percent or less, depending on the lender. When that happens, collateral will be used, such as the property itself, as long as you still have equity in it.
3. Lien Priority
Lien priority, also known as lien position, is the order in which the law recognizes the claims made by lenders against a property. In other words, it decides who gets paid first in case of a foreclosure or a default.
When working with hard loan lenders, they will only give you money if they know they can be in the first position of the lien priority. As such, if you have another mortgage and are planning to use a hard loan as a second mortgage, you may not be successful.
Hard money loans are great to give you quick access to the money you need to achieve your goals. Just take note that these loans will be safeguarded with your assets and other collateral, depending on the lender. For that reason, make sure you have plenty of one or the other, or even both, to give yourself the best chances of getting approval for a hard money loan!
DFW Investor Lending is an investor-owned and operated hard money lending service in Dallas, TX, helping individuals discover the best loan deals to save as much money and time as possible. If you are looking for hard money lenders in Dallas, reach out to us today!