Hard Money Lending Guide for First-Time Real Estate Investors
Getting your first real estate deal across the finish line is both the toughest and most memorable part of an investor’s journey. You’ll never forget your first deal! However, many first-time investors who have a property under contract quickly discover that securing financing can be a challenge. Finding a lending partner to fund both the purchase and the renovation can feel daunting, especially if lenders seem reluctant to finance your project.
In this guide, we’ll walk through some key points for first-time real estate investors seeking hard money loans and explain what it takes to successfully secure funding.
1. Manage Your Expectations
It’s important to enter the process with realistic expectations. Hard money lenders, especially those who cater to first-time investors, are typically equity-focused. This means they prioritize the borrower’s “skin in the game,” often requiring at least a 25% down payment on the deal. Lenders consider this a minimum threshold to show commitment to the project.
If you have at least 25% down, you’ll be viewed as a stronger candidate and a “high-quality” borrower. Without it, many lenders may pass on your deal.
2. Credit Scores Matter, but Aren’t Everything
While hard money loans are more lenient than traditional loans in terms of credit requirements, having a good credit score is still important. A score of 700 or higher is ideal and will make the process smoother. Scores between 650 and 700 are still acceptable, though borrowers in this range may need to demonstrate stronger liquidity or offer a higher down payment.
If your score falls below 650, you’ll likely need to work with an asset-based hard money lender. These lenders are more focused on the property itself than your personal creditworthiness, but they may require a higher down payment—often 35% or more.
3. Keep Renovation Budgets Realistic
For first-time investors, lenders are typically cautious about funding 100% of the renovation budget. Most private lenders prefer working with seasoned investors for full renovation financing. As a first-time investor, it's wise to keep your renovation budget manageable—30% of the purchase price or less is a good benchmark. For example, if you’re buying a property for $500,000, aim for a renovation budget of no more than $150,000.
Smaller renovation projects allow new investors to gain experience without the risk of being overwhelmed by unforeseen issues. Avoid taking on large, complex renovations until you’ve built up some confidence and expertise.
4. Get the Right Insurance
Having the correct insurance in place is another key to success. For properties undergoing renovation, you’ll need a vacant renovation property insurance policy. Many insurance agents mistakenly issue landlord policies, which could lead to disastrous consequences if the property is vacant and damaged (such as in a fire).
Additionally, general liability insurance is a must to protect both you and the lender. This extra layer of coverage ensures that any potential accidents or issues during renovation are covered.
5. Ensure Adequate Liquidity
Lenders want to see that you have sufficient liquidity to cover more than just the down payment. Having several months of interest reserves, closing costs, and a contingency fund for renovation overruns will position you as a “high-quality” borrower. This liquidity ensures you can weather any financial storms that might arise during the project and gives lenders peace of mind that their investment is protected.
6. Formal General Contractor (GC) Contracts Are Essential
Before you approach a lender, it’s important to have a signed general contractor (GC) contract in place. Many lenders will ask for both a GC bid and a signed contract before funding your renovation. These documents provide a clear scope of work, a budget breakdown, payment terms, and a timeline for the project.
A formal GC contract not only reassures lenders but also protects you as an investor. If any disputes arise during the renovation, the contract serves as a legal document that outlines responsibilities and obligations.
7. Realistic Appraisals
Finally, most lenders will request an After-Repair Value (ARV) appraisal. While you or your real estate agent may have run comparable sales to estimate the property’s future value, lenders will order their own independent appraisal. This appraisal adjusts the value based on your renovation plans and determines the ARV.
It’s important to be realistic—and slightly conservative—about the ARV. Overestimating the value could lead to surprises down the road if the appraisal comes back lower than expected. Setting a realistic ARV helps manage expectations and keeps the loan approval process on track.
Final Thoughts
The journey of securing your first hard money loan can feel overwhelming, but by setting realistic expectations, managing your budget, and ensuring you have the right documentation, you can increase your chances of success. Hard money lenders want to work with committed, prepared investors, and by demonstrating that you have the right systems and protections in place, you can make the process much smoother.
Remember, getting your first deal is always the hardest, but with the right approach, you’ll be one step closer to building a successful real estate investment portfolio. Vorfin welcomes first-time borrowers—check out our loan products page and get in touch with us to secure funding for your next project!