Ep 4: What It Takes to Qualify for a Hard Money Loan

Episode 4: What It Takes to Qualify for a Hard Money Loan

 

[NEIL] A borrower walked in with a credit score most banks would have laughed right out of the room.

[MAGGIE] And you funded him anyway.

[NEIL] Funded him more than once. Because the score was never the real question.

[MAGGIE] So what is the real question? That's today's show.

 

[MAGGIE] Welcome back to Flipping Iowa. I'm Maggie Monroe.

[NEIL] And I'm Neil Timmins.

[MAGGIE] Neil, I want to start with something that comes up constantly in my inbox. People finally find a deal, and then they freeze, because they don't know what a hard money lender actually wants to see.

[NEIL] It's the most common question I get. And it's usually followed by somebody apologizing for their credit before I've even asked about it.

[MAGGIE] Which tells me they think this works like a bank loan.

[NEIL] Most people do. Two years of tax returns, a W-two, a committee somewhere grading your whole financial life. That's not how this works, and today we're going to walk through exactly what I do check, in order, so nobody has to guess anymore.

[MAGGIE] Let's get into it.

 

[MAGGIE] So if it's not your tax returns and it's not your W-two, what is it? Walk me through what you're actually looking at when a deal lands on your desk.

[NEIL] I'm underwriting the property first and the person second. That's the single biggest difference between what I do and what a bank does.

[MAGGIE] And I think that surprises people, because they assume the opposite. They assume you're grading them.

[NEIL] I'm grading the deal. Does the address exist, is it under contract or close to it, do the numbers hold up. The borrower matters, don't get me wrong, but the property is where I start.

[MAGGIE] So if someone's sitting there worried about their financial history, that's not actually where their energy should go first.

[NEIL] Correct. Their energy should go into the five things I'm about to walk through, because those are the things that actually decide whether a deal gets approved.

[MAGGIE] I think that's a relief for a lot of first-timers, honestly. They picture a loan committee somewhere in a back room, poring over their entire financial life.

[NEIL] There's no back room. There's me, looking at whether the numbers on this specific property hold up. That's a much shorter conversation than people expect it to be.

[MAGGIE] Does that mean somebody with a spotless financial history but a bad deal gets turned down just as fast as somebody with a messy history and a great deal gets approved?

[NEIL] Every time. A perfect credit score does not fix a house you overpaid for. And a rough credit history does not sink a deal that actually pencils. The deal is the deal, regardless of who's standing next to it.

[MAGGIE] Five things. Let's hear them.

 

[NEIL] First, a real property, under contract or close to it, with a real address and a real price. Second, recent comparable sales that actually back up the after repair value they're claiming. Third, a written rehab scope with real line items, not a number somebody guessed at over coffee. Fourth, cash for their share of the deal plus reserves to carry it if something runs long. And fifth, a believable exit. Sell to a retail buyer, or refinance and hold.

[MAGGIE] Let's take those one at a time, because I think the comps and the rehab scope are where most first-timers actually trip up.

[NEIL] They are. Start with the after repair value. If the comps are stretched, or they're pulled from the wrong pocket of the metro, that loan gets harder to approve no matter how good your credit is. A house two miles away in a different school district is not a comp, even if the square footage matches.

[MAGGIE] And the rehab scope?

[NEIL] Same problem, different flavor. If somebody hands me a scope that says twenty five thousand dollars, rehab, one line, that tells me they haven't walked the property closely enough yet. I want it broken into phases. Demo, mechanicals, cosmetics, so on. A real scope protects the borrower as much as it protects me.

[MAGGIE] Because that's the number that's supposed to survive contact with the actual house.

[NEIL] Exactly right.

 

[MAGGIE] Let's talk about the cash piece, because I think that's the part first-timers underestimate the most.

[NEIL] It is. A hard money loan almost never covers every dollar of a deal. So the borrower brings cash to close the gap. That covers part of the purchase price, closing costs, and a reserve cushion in case the rehab runs long or a permit takes an extra week.

[MAGGIE] Is that gap a fixed amount, or does it move depending on the deal?

[NEIL] It moves. The deeper the discount somebody buys at, the smaller that gap gets. A property bought well under market value needs less of the borrower's own cash to make the numbers work. A thin deal needs more.

[MAGGIE] So buying right isn't just about profit margin at the end. It's about how much cash you even need to get in the door.

[NEIL] That's exactly the connection people miss. And this is where the loan structure itself matters, because it sets the ceiling on everything. Up to ninety percent of the purchase price. Up to one hundred percent of rehab costs. But a maximum of seventy percent of the after repair value, and that ARV cap is the controlling limit on the whole loan.

[MAGGIE] Meaning the purchase and the rehab can both look fine on paper and still get capped.

[NEIL] Right. If the total pushes past seventy percent of ARV, it doesn't matter how clean the individual pieces look. Run that number before you fall in love with a house.

 

[MAGGIE] Give me a real example, because I think seventy percent of ARV sounds simple until you're staring at an actual listing.

[NEIL] Take a ranch in Ankeny listed at one hundred sixty five thousand dollars. Thirty five thousand in rehab. A realistic after repair value of two hundred fifty thousand, based on recent sales nearby.

[MAGGIE] So seventy percent of that ARV is...

[NEIL] One hundred seventy five thousand dollars. That's the ceiling. Now add the purchase price and the rehab together. One hundred sixty five plus thirty five is two hundred thousand. That's over the line. As structured, this deal doesn't qualify.

[MAGGIE] So what does the borrower actually do with that information?

[NEIL] Bring the purchase price down. Say to one hundred forty thousand, which is closer to what distressed inventory in that price band is actually trading for right now. Now the all-in cost is one hundred seventy five thousand. It fits. And the borrower knows exactly what cash they need to bring to close.

[MAGGIE] And that math doesn't change if you're looking somewhere else in the metro. Altoona, Norwalk, wherever.

[NEIL] Doesn't change at all. The ARV cap stays fixed. The purchase price is the one lever the borrower controls, and that's the lever they should be pulling before they get emotionally attached to a house.

[MAGGIE] We've talked through four of your five things. Comps, the rehab scope, cash and reserves, and now the ARV cap. The fifth one was the exit. How much does that actually get scrutinized?

[NEIL] More than people expect. I want to know, specifically, is this a sell to a retail buyer, or a refinance and hold. Because those two exits get underwritten a little differently.

[MAGGIE] How so?

[NEIL] Sell to retail, I'm mostly watching days on market for that price point and that neighborhood, so we both know the after repair value holds up when it's time to list. Refinance and hold, I want to see that the numbers work as a long-term rental too, not just as a flip. Rent has to support the new loan once it refinances out of mine.

[MAGGIE] So a borrower can't just say I'll figure out the exit later and expect that to fly.

[NEIL] Not with me. A vague exit is one more thing I'd have to guess at, and I don't guess on other people's money. Tell me which one it is, and tell me why, and we're in good shape.

 

[MAGGIE] Okay, before the break you teased a borrower with a credit score most banks would have laughed at. Tell me that one.

[NEIL] Repeat borrower. Been doing consistent, high quality fix and flip work across a bunch of different price ranges for years. And on paper, his credit score is not impressive.

[MAGGIE] So how does that deal even get to yes?

[NEIL] Compensating factors. He brings a co-signer on his deals. He brings a substantial down payment every time. And here's the part people miss. He almost never asks me for rehab dollars. His own cash covers the construction.

[MAGGIE] Which changes the loan to value you're actually holding.

[NEIL] Significantly. We're typically looking at fifty to sixty percent of after repair value on his deals, well below what most borrowers request. That combination changes the entire risk profile, regardless of what the score says.

[MAGGIE] What does the credit score not tell you, in his case specifically?

[NEIL] It doesn't tell you that he shows up. He's on site routinely, all week, every week. He's worked with the same set of contractors for the better part of a decade. That's not luck. That's someone who's built a real operation over time.

[MAGGIE] And the work backs it up.

[NEIL] Every time. Consistent quality, deal after deal, from first-time home buyer properties up into the three hundred thousand dollar range. He runs lean, keeps costs tight, and the finished product performs in the market.

[MAGGIE] So when you're weighing a file like that, the number on the credit report is basically one input out of several.

[NEIL] One input. Not the whole decision. A documented track record, stable contractor relationships, a low loan to value request, real cash and a co-signer in the deal, that's a borrower who's reduced my risk in ways a three digit number never could.

[MAGGIE] That's the whole argument for underwriting the deal instead of just running a number through a template.

[NEIL] That's the whole argument.

 

[MAGGIE] Let's take some real objections, because I know people are thinking these. First one. What if my credit really isn't good? Like, actually rough, not just below seven hundred.

[NEIL] Credit still gets checked. I'm not going to tell you it doesn't matter at all. But it's not automatically disqualifying. If it's rough, expect the compensating factors to matter more. A bigger down payment. A co-signer. A lower loan to value request. Bring me more of those, and a thin credit file stops being the deciding factor.

[MAGGIE] Second one. What if someone genuinely doesn't have much in reserves? They can cover the purchase gap, but that's about it.

[NEIL] Then the deal itself needs to carry more of the margin for error. A bigger discount at purchase, a tighter rehab scope with less room for surprises, a realistic timeline instead of an optimistic one. Thin reserves plus a thin deal is where projects get into trouble. Thin reserves plus a deal with real margin, that's still workable.

[MAGGIE] Third one, and I think this is the big one. Somebody's a total first-timer. No track record at all. Does that automatically make it harder?

[NEIL] It makes the property do more of the talking. No track record means I'm leaning harder on real comps, a real scope, and cash in the deal, because I don't have deal history to lean on yet. First-time investors get approved every week in this market. They just show up with a deal that actually makes sense, not a perfect resume.

[MAGGIE] So the resume was never really the point.

[NEIL] Never was. The deal was always the point.

[MAGGIE] One more. What if somebody's exit plan is refinance and hold instead of a retail sale? Does that make qualifying any harder?

[NEIL] Not harder, just different. I still want the purchase, the rehab, and the ARV cap to pencil the same way. But I'm also checking that the rent supports the loan it refinances into. If the numbers work as a flip but fall apart as a rental, that's worth knowing before closing, not after.

[MAGGIE] So say the plan out loud, and mean it.

[NEIL] Say it out loud, and be ready to back it up with real numbers either way.

 

[MAGGIE] Before we wrap, this is something we like to close every episode with. A little piece of Iowa history.

[NEIL] Let's hear it.

[MAGGIE] FDR signed the Social Security Act on August fourteenth, nineteen thirty five. And here's the part most people don't know. The payroll tax underneath it didn't even start until nineteen thirty seven, and it was a flat one percent, on both the employer and the employee.

[NEIL] One percent. That's it?

[MAGGIE] That's it. Nobody called it permanent at the time either. It was pitched as a modest safety net, bolted onto paychecks that were already thin from the Depression.

[NEIL] And now it's just there. Every single check.

[MAGGIE] Ninety one years later, that same payroll withholding line is still sitting on every check you cut for a crew, whether you think about it or not.

[NEIL] Funny how the small, modest thing is the one that never goes away. Kind of like a reserve line in a budget. Feels optional until the week you actually need it.

[MAGGIE] I like that connection more than you probably intended.

[NEIL] I'll take credit for it anyway.

 

[MAGGIE] Alright, let's bring it home. If someone takes one thing from today, what should it be?

[NEIL] The deal gets underwritten before the person does. Real comps, a real rehab scope, cash for your share plus reserves, and a believable exit. Get those four right and the credit conversation stops being the scary part.

[MAGGIE] And the number that actually controls the whole loan.

[NEIL] Seventy percent of after repair value. Ninety percent of purchase, one hundred percent of rehab, sure, but that ARV cap is what the whole structure fits inside. Know that number before you get attached to a house.

[MAGGIE] And don't assume a rough credit file kills the deal before you've even asked.

[NEIL] Ask first. You'd be surprised how often the answer is yes.

[MAGGIE] This has been Flipping Iowa. If you got something out of this one, share it with a friend, and be sure to subscribe so you don't miss the next one. Catch you on the next episode.

[NEIL] Talk soon.