Hard money lending is known as asset-based lending because approval decisions are made almost entirely based on the value of the asset being offered as collateral. But this in no way implies that hard money lenders do not look at other factors. They do. Those other factors influence the type of offer a lender might make.

Given that the majority of hard money loans go toward funding real estate acquisitions, the remainder of this post will be from that perspective. The principles you read here also apply in other hard money situations, with only slight differences in the details.

Asset Value Is Tops

The first and most important thing a hard money lender will look at is asset value. Imagine a Utah investor attempting to buy an office complex with funding from Salt Lake City’s Actium Partners. That investor lists the property’s value in his application. Meanwhile, Actium sends its own appraiser to value the property.

Asset value tops the list because it determines approval. If the value is there, the loan is likely to be approved. But if not, the lender will most likely reject the application. Above and beyond the property’s value, a lender will look at some other things.

Property Potential

Hard money lenders look at property potential in terms of having to dispose of the property should it become necessary. In other words, how easy will it be to sell the property should the borrower default on his loan? How much time and effort will the lender have to put into taking possession of and selling the property? Low potential adds to the lender’s risk.

Another aspect of property potential is its strength as an investment opportunity. An office complex with full occupancy represents a strong investment because it is generating income on top of the value of the actual land. Lenders truly appreciate this sort of thing.

Investor Cash Reserves

Hard money lenders tend to offer considerably lower loan-to-value (LTV) ratios compared to banks. That means investors need to contribute a greater amount with their down payment. Lenders will look at cash reserves to better understand whether an investor will have enough operating cash after putting in his down payment. A lack of cash jeopardizes the deal.

The Investor’s Exit Plan

Investors propose an exit plan when applying for a hard money loan. An exit plan is essentially the method by which the investor will pay the loan at maturity. Bear in mind that most hard money loans are structured as interest-only loans, meaning the investor makes interest payments on a monthly basis. He pays the principal on the loan’s due date.

Investors need to present a reasonable exit plan to convince lenders to get on board. An investor whose strategy is little more than rolling the dice and hoping for the best is not offering a reasonable plan. His loan application will not get very far.

Credit and Past History

Although hard money lenders typically do not rely on credit and past financial history for approval decisions, they do look at these two factors when determining rates and terms. Like any other type of loan, poor credit and a questionable history will lead to higher rates and shorter terms.

Asset value is the single most important factor in determining whether or not a hard money loan will be granted. But lenders do look at other things for the purposes of assessing their risk. Whatever it might be, risk influences the offer a lender makes. The higher the risk, the less attractive the offer from the borrower’s perspective.