Have you ever heard claims that hard money lending is ‘last resort’ lending for desperate borrowers who cannot get conventional bank loans? If so, forget them. Hard money lending is not at all what it has been made out to be. Lenders are not careless. They don’t throw money at everyone who asks for it. They have very strict criteria designed to protect them against financial loss.

Based in Salt Lake City, Utah’s Actium Lending says that hard money underwriting is actually very structured. It does not look that way because lenders don’t do things the same way banks do. Their underwriting emphasizes the deal and asset collateral more than personal income and tax returns.

Being private lenders gives firms like Actium Lending more latitude in determining their underwriting criteria. There are four types of criteria that are pretty standard across the hard money industry:

1. Collateral and Leverage

The criteria begin with numbers pointing to a property’s value and condition. Remember that hard money lending is asset-based. A lender wants to know the value of the property being acquired because it determines how much a borrower can get. Lenders rely on things like appraisals, BPOs, recent comps and other factors to determine value. A property definitely cannot be obsolete or located in a weak market if a borrower hopes to get a favorable loan.

Along the same lines is the lender’s loan-to-value (LTV) ratio. Although lenders are able to set their own LTVs as they see fit, maximum ratios tend to be in the 60-75% range. Lenders typically require down payments of 20-40%.

2. The Borrower’s Plan and Economics

Lenders are very concerned about a borrower’s plans for the acquired property. For example, is it a rental property already generating significant income? If not, how long does the borrower think he will need to stabilize the property and get rental income on par?

The borrower’s plan for profit matters is well. Perhaps he’s looking at a certain return that the lender believes is unrealistic based on his business plan. A lower-than-expected profit margin could put the entire deal in jeopardy.

Finally, this category also includes the borrower’s exit strategy. A strong exit strategy is one that is both workable and highly likely to succeed. Few lenders will approve loans without a solid exit strategy in place. An exit strategy is just part of the equation.

3. Borrower Profile

This next criterion type hits directly at the myth that hard money lenders will lend to anyone. It is simply not true. Lenders will look at a borrower’s profile, which is to say that they want to know that a borrower knows what he is doing and has the resources and ability to pull it off.

For example, a lender will look at a borrower’s experience. A property investor with decades under his belt is more likely to be approved than a brand-new investor looking to purchase his first property. But experience alone is not enough. A lender will look at past projects, a borrower’s cash reserves and equity, and whether the borrow has significant issues – like outstanding judgments against him.

4. Specific Risks

Last but not least are specific risks that could jeopardize the lender’s finances. For example, certain types of title quirks are curable prior to closing. Others are not. An incurable title quirk presents too much risk to a lender. No deal will be forthcoming.

Underwriting criteria for hard money lenders are a bit different. Nonetheless, the criteria are designed to ensure smooth transactions that benefit both parties. And now you know.