How To Pre-qualify a Hard Money Mortgage

This online hard money mortgage qualification calculator is designed for sophisticated investors who can vary the loan parameters, although you can leave the loan parameters at their defaults. Qualifying a borrower for a hard money mortgage is about your safety as a lender and we assess that by using multipliers based on the mortgage amount, loan to value (LTV) and the interest rate, so you can see different scenarios.

How much to lend is a very difficult question. The most important thing is that you do not lend more than is safe to lend and always make sure your borrower has their cash down too.

In This Article

Calculator to Pre-Qualify a Hard Money Mortgage

Use our Hard Money Mortgage Qualifier Calculator to find out the safe amount to loan. Follow our example below for the default settings of this calculator.

The Default Settings for the Calculator are for this Example

The fair market value of the property is $100,000 and there is a balance of an existing mortgage on the property that is $5,000. The cash the borrower is putting down is $10,000 and they have good credit. Because they have great credit, we’ve entered 10 for Rate borrower credit. You want to know how much it is safe to lend for this 2nd mortgage.

The loan amortization will be 360 months which is 30 years and the payoff will be due in 120 months which is 10 years.

1. Credit and Mortgage Multipliers
   We’ve started with a base LTV of 60 in the ‘63% safe LTV before adding credit rate #:’ field.
   Then, we’ve set the ‘Multiplier of credit rating calc LTV:’ field to 1 and then because this is a 2nd mortgage, we’ve set the ‘Multiplier of mortgage remaining:’ to 1.5.

The result is we can safely lend $62,500, which means the LTV is 62.5%.

2. Interest Rate Multipliers
   We’ve set the nominal interest rate to 15% and then the credit score multiplier to 2 as the
   borrower has good credit. We’ve set the downpayment multiplier to 2, as there’s cash being
   put down, but it could be more.
3. Second Mortgage Premium
   The Amount int. rate increases if second mortgage is set to 1.3 as this is a 2nd mortgage and we want a higher interest rate to reflect this.
4. Loan Expenses
   The loan expenses are summarized and total $4,325. The points are 3%, which is shown as $1.875, which is based on the safe amount to lend. Take off the expenses from the safe amount to lend of $62,500 and the amount to borrower is $58,175.

What is the interest rate to charge?
The interest rate to charge in our example is 9.75% taking into account the loan details and the various multipliers.

How to Minimize your Risk

First, you need to calculate the TOTAL mortgage you would give on this property. From this of course you need to subtract the amount of the first mortgage.

But, we recommend being a little more conservative than this. We multiply this first mortgage amount by 1.5 to provide a safety zone if we have to make the first mortgages payments while foreclosing the mortgage.

Example: Assume the property would qualify for a total mortgage of $80,000, If this was a first mortgage. BUT, the borrower is getting or already has a first mortgage of $30,000. Would you want to lend the difference, that is $50,000? We think not.

Instead we multiply the first mortgage amount, $30,000, by 1.5. This is $45,000. NOW subtract $45,000 from $80,000 to get the amount you should loan. That is, loan $35,000.

• Want to be more conservative about writing behind a first mortgage? Then increase the multiplier from 1.5.
• Want to be less conservative about writing behind a first mortgage? Then reduce the multiplier from 1.5.

But it should NEVER be less than 1.0. Or just DON”T make second mortgages! We do not recommend originating second mortgages, but there are times when it might be attractive.

Loan to Value Ratio Multipliers

Credit History

We allow a safe LTV for terrible credit of 60%. You can increase or reduce this as you wish. Want to be more or less conservative about the LTV, perhaps this is commercial or vacant land? Just change the number.

We increase the safe LTV by adding on the 0 to 10 credit rating. You can increase or reduce that if you wish.

Example: If the borrower has a credit rating of 5 we increase the maximum LTV allowed from 60 to 65%.

Want to be more or less conservative about the effect of the credit rating on the LTV? Just change the Multiplier from 1.

• If you set this multiplier at 1.5 then in the above scenario you would allow an LTV of 60 + 7.5 = 67.5%.
• If you set this multiplier at 0.5 then in the above scenario you would allow an LTV of 60 + 2.5 = 62.5%.

Down Payment

We also increase the LTV based on the percentage CASH down payment made by the borrower. We feel someone who has put down, say 20% CASH, is much less likely to walk away from the loan than someone with NO CASH INVESTED.

So if you would loan 65% with zero cash down, we think you should lend 75% with 10% cash down, other things being equal. Of course, make sure you NEVER loan more than the value of the property.

Interest Rate Multipliers

We reduce the base interest rate from 15% by a multiplier of the credit rating. You can change the base interest rate and this multiplier.

Example: if the borrower has perfect credit (10) then we reduce the interest rate from 15% to 10%. If however you change the Interest Rate Multiplier to 10 then under the same circumstances the interest rate would only go down from 15% to 14%. Likewise, if you change the Interest Rate Multiplier to 1, then, under the same circumstances the interest rate would go down from 15% to 5%.

The interest rate will also go down if the down payment goes up due to the reduced risk to the lender. The Interest Rate Down Payment Multiplier will control the effect of this.

Lastly, we believe that second mortgages should have a higher interest rates than first mortgage. You can set the amount by how much more. Remember to always stay within any laws governing predatory lending rates or usury rates!

Further Reading on Hard Money Lending:

• For an accurate APR statement see the Federal Financial Institutions Examination Council FFIEC APR and APY tools.

DISCLAIMER: This calculator is based on certain assumptions. The projections are estimates only. Anyone using or relying on this calculator is advised to seek competent legal, financial, and/or tax advice. We accept no responsibility for the outcome of any loan you or your clients make based on the recommendations of this calculator, nor do we guarantee the accuracy of the calculations. 

This calculator is copyright of mortgageinvestments.com.