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Today, we're going to go over what do hard money lenders look at when they're analyzing your deal. Before we dive in a look at exactly what they look for, let's remind everyone what hard money is and what it's not.
Hard money loans are loans that are outside the box, outside the banker's box, outside the private lenders' box. Um, they're more unique lending, more asset-based lending. And when I mean outside the banker's box and the private lenders' box is, hard money lenders will look at almost any deal that's real estate based that someone does not live in as far as an owner-occupied property. So, land, homes, commercial buildings, whatever it may be, uniqueness, all of those things are open game for a hard money loan. And that's why even seasoned investors out there use hard money all the time because maybe they've hit their max with their current lender, or maybe it's a quick deal, or maybe it's just a unique deal that they need someone who thinks outside the box, outside the banker's box, outside the private lenders' box. So, that's what hard money lending is.
Now, let's look at what hard money lenders look for when they're evaluating your deal. So, remember, the goal of hard money lenders is to lend you the money, help you get a project done, and then get their money back with interest. Hard money lenders are not there to try to take your property, not try to, you know, just run up fees, all those kind of things. True hard money lenders want to put their money to work, help you out, get their money back, and then do it again. So, understand that.
The number one thing that hard money lenders are looking for is your exit strategy. Can they verify how you're going to pay them, them off? Is it a flip, so you're going to sell it? Is it a rental property, so you're going to refinance it? Is it another kind of transaction where there's going to be a different kind of lender come in after a phase is done, like splitting up lots or getting it to an occupancy on a commercial property? The lender wants to know what your plan is with that property, and is it feasible? Is the dollar amount that you're looking to sell that property for, is that the market? Is that what is happening in the market? The refinance, same thing. Can they get it appraised? How likely is the money that you're bringing in from other investors going to be there, be on time, be enough to pay off the lender? The number one thing we're going to look for is your exit strategy and making sure that it is a good story and that we can verify the information.
Number two, we're going to look for short-term loans. Nine to 12 months are the typical loans that hard money lenders will look for, even though we'll go out to two to three years, but typically it's shorter term. It's a bridge loan, it's something that is not for permanent use on property. So, you're looking for loans that are typically 12 months or less, but can go out to three years.
Next is credit scores. Credit scores do not matter with hard money lenders, but credit does. And what I mean by that is, they're going to look at your credit. They're going to see if you have a habit of having late pays, maybe had a bankruptcy, may have foreclosure. They want to know these items on your report because they want to know if you're going to pay them on time without any hassle. That's all the lender really wants: give you the money, get paid back, and go on to the next one without any hassle. So, if you have a history of not paying people on time, it's going to be harder for you than someone who has a lower score, but it's just because of usage. So, remember, your credit habits do come into account when you're looking at underwriting for a hard money loan. They want to make sure you're paying other people on time because that reflects on how you'll pay them.
So, what else do we look for? A lower loan-to-value is typically under 75% loan-to-value, unless it's a fix and flip, and then it's 75% of the ARV. Also, good quick work. Looking for projects that people get into, get them done fast, get them done right. So, when they sell them, refinance, or whatever, it's not going to be a big issue to move on, exit out of them. Timing really matters in hard money and any other kind of loan because we want to make sure that you're not dragging something out because the longer it goes out, the more stress it creates for you and your lender.
So, what do hard money lenders not concern themselves with? As we said before, credit score. They're worried about credit, not credit score. Number two, income. They don't care if you just started a job, you've been in business two years, 10 years, no years. Um, they don't really look at tax returns or anything like that like banks and some of the other lenders do. And third, even reserves. If your reserves are a line of credit on your house, HELOC, using credit cards, all those kind of things, hard money lenders are more flexible than your traditional banks and private lenders.
So, what's the big difference then in pricing when you're talking hard money compared to private lending? I consider private lending the Kavis, the Rovos, back flips, the bigger Wall Street kind of money out there who supply a lot of money for flips and even DSCR loans. So, typically hard money is going to be somewhere between 10 and 12% on first mortgages, where your private lenders, uh, are going to be somewhere maybe a half a point to a point better, depending on your experience and your LTV. There's many times though that hard money is actually cheaper than private lending. So, if you're out there and you're looking, it's to shop around. We have a tool for you at the end that you could download and you could shop comparison based on this deal.
Besides interest rate, points. Uh, hard money is typically somewhere between two and three points. Points is origination. That's the fee that you pay the lender. So, one point, for an example, is 1% of the loan. So, when I say hard money lenders charge between two and 3%, that means they're charging between 2 and 3% of the loan that they're going to give you. Private lenders on the other side are probably a point lower than hard money lenders, but it comes with a little bit of a caveat. They have more junk fees, fees like, you know, underwriting, processing, credit, background checks, LLC verifications through their lawyers, a lot of these different things add up over time.
What kind of properties do hard money lenders, you know, lend on? This is where our box is a lot bigger than your private lenders because we'll look at the single-family homes or the, the homes for flips and rentals. We'll also look at, you know, small commercial, even some mid to larger commercial, land. And the biggest thing is unique properties. So, something that maybe just fits outside the box. Maybe, for example, you're buying a house to split off the back, you know, acres. We just had a person do this. They bought a house in town with a hard money loan and they were able to split off the back portion and then sell the home. And hard money was flexible enough to when they sold the home, which did not pay off the total loan, it kept it on the back unit, the back property that they just split up. So, there's all kinds of unique situations that come up that hard money is perfect for compared to your bank and private lender.
So, where do you find hard money lenders? That's a great question. If you have a go-to way that you do it, leave a comment below. But typically, what we find is through networking, either, you know, live network events in your area that for real estate investors, your realtors who work with real estate investors, or going online to, you know, some of the meetups and stuff like that, asking them, maybe Bigger Pockets connected investors who other people are using in that area. And then you probably just have to do a Google search and look past page one, maybe even past page two, where all the large companies are paying pay-per-click to actually get those spots and find the true local hard money lenders that are going to be able to help you get something in fast in your area, and especially if it's unique.
So, it all comes out of this. Hard money lenders is someone everyone should have, every investor from the seasoned investor to the people just starting out, because you'll never know when you need something done fast, that's unique, or you just need a higher loan-to-value. That's where you shop local hard money lenders. And we have a great tool for that. Go to hardmoneymike.com and there's a download. It's called the Loan Cost Optimizer. You could put in the different from private lenders to hard money lenders and figure out by putting in the points, the interest rate, all these different things, what lender is best for this particular product. Because each project comes with uniqueness. Maybe this one you can't put as much down as some of the private lenders are looking for, or maybe your credit score is down a little bit right now because you just used a lot of personal cards. Whatever it may be, hard money lenders are here to help. And we look forward to seeing you on the next video.
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