Inside Our Hard Money Loan Evaluation Process

Key Takeaways

  • Understanding the basics of hard money loans is crucial.
  • A fast evaluation process helps real estate investors and others achieve their goal of a speedy loan closing and funding.
  • Legal compliance and detailed documentation are non-negotiable.


In the fast-paced realm of real estate investing, getting funding on time is critical for your success. That’s why so many real estate investors depend on hard money loans. Hard Money Loans from Private Money Utah are approved quickly with fast funding so that real estate investors can pounce on real estate deals that won’t last long.

But how do we review real estate deals for viability and evaluate risks as the basis for our lending decisions? 

Let’s talk about our loan evaluation criteria for our hard money loans so you can understand how this hard money lender approves and declines loans.

Understanding the Basics of Hard Money Loans

What Are Hard Money Loans?

Unlike conventional loans, hard money loans are primarily asset-based loans, which is one factor that helps expedite the approval process. Hard money loans get their name from using hard assets as collateral such as real estate.

What Type of Borrowers Use Hard Money Loans?

There’s a common myth out there that only desperate or bad credit borrowers are those willing to pay the higher interest rates typically associated with hard money loans. But this couldn’t be further from the truth! In fact, there are so many reasons that people use hard money loans, in fact, some may surprise you. Discover the many reasons why people get hard money loans in greater detail here, and see how many of these reasons turn out to surprise you! 

Our Evaluation Process- How we look at a real estate deal

Our evaluation process for a loan is:

  1. Borrower and/or other third parties provide information about the property being used as collateral for the loan and the borrower.
  2. We review all of the information provided by the borrower and other third parties. We verify that the information is accurate.
  3. After we’ve reviewed all of the information and documentation for the loan file, we do a risk analysis to determine if the level of risk is acceptable.
  4. Once we’ve determined if the level of risk is acceptable, then we price that risk and present the final loan terms to the borrower. 

The subsequent sections will go deeper into the evaluation criteria, legal compliance, and other facets of our due diligence process before approving a loan. For a sneak peek into some real estate deals evaluated and funded by us, check out our Recent Loans Closed section.

Real Estate Deal Evaluation Criteria: The 5 Cs

The 5 Cs are the criteria that make up our evaluation framework in order to fund a hard money loan. The 5 Cs are: Collateral, Character, Cash, Credit, and Cybersecurity.


Property Use: A thorough review of the property that will be used as collateral for the loan is one of the aspects of asset based loans. The borrower must be ready to provide all of the available information about the property to the lender, including some information that may not be readily available.

Understanding the zoning laws and land use regulations is essential for any lender before lending on a property.

Is there an HOA that regulates property usage? Is the property located in a special district, etc.? Is there a factor about the location that will make the property less desirable? Is there access, or is some sort of easement required? These are just a handful of aspects about the property that a lender looks at when evaluating a loan opportunity.

Property Value: Do the numbers work?

      1. Loan to Value (LTV) Ratio: This crucial metric mirrors the loan amount against the value of the property, or the purchase price, whichever is lower typically. Most hard money lenders lend a certain percentage of the purchase price for a property on purchases, rather than on the appraised value. Because every hard money lender is different, find out what your lender’s max LTV is on purchases and on refinances.
      2. BPO of value versus a Professional Appraisal: Hard money lenders use a variety of methods for valuing a property. Depending on the complexity of the loan, or if a lender doesn’t understand the market well, a lender may choose to go with an appraisal to determine a value for the property.  However, if a lender understands the market well, or needs to close the loan in a hurry, a lender may opt for a Broker’s Price Opinion, often called a “BPO,” to determine a value for the property.  But it’s not as easy as just ordering an appraisal or a BPO. A lender really needs to analyze the report, talk to real estate professionals, and run the numbers, especially on income-producing properties.
      3. Purchase Price Evaluation: If the loan is being requested for a purchase, we must analyze the purchase price against the as-is value of the property. Is the asking price for the property based on its future, intended use? Or is it based on a future value or future rents? If the borrower is paying a lot more for a property as compared to its as-is value, the borrower may need to bring in a larger down payment.  This is because a lender may not be able to rely on a future value given that it requires the work of the borrower to achieve the future value. And if the borrower doesn’t take the action required, there may not be a future value that a lender can count on.Cap rates are something to factor in as well, particularly on a purchase of an income-producing property.
      4. After Repair Value (ARV) and As Completed Value: Typically for Fix and Flip Loans, and construction loans, the “ARV,” or the “As Completed Value,” provide a future property value after repairs are made, or after construction is completed.  Loans that rely on a value at a date in the future, are always higher risk, so a lender must consider all of the potential risks to achieving a future value and how those additional risks can be mitigated.

Ensuring a Clear Title: A thorough title search is imperative to ascertain that the property is free from any liens or litigation. 

Access to Water: Particularly in drier states, water is very important in real estate, so always make sure the property has a source of water, unless the property is on city water. And if a well is required, does the property have a well permit in place, and if not, are permits available in the area where the property is located?

Character: Borrower’s Experience with the Property Type & Track Record 

Evaluating the borrower’s character is not what it seems on the surface. We are not looking at personality traits or moral standards, we are looking at the borrower’s experience, track record, and history.

The questions that should be asked include: Does your borrower have real estate investing experience with this particular property type that is being used as collateral for the loan? Can your borrower carry out the type of project being proposed?

Does your borrower have the track record and experience that can be relied upon?

Cash: Borrower’s Financial Assessment

While the primary focus is on the property, understanding the borrower’s financial standing provides a larger picture of the risk involved. Higher risk doesn’t mean a loan will be declined, but the final interest rate or fees may reflect a higher risk.

Down Payment or Cash Equity: What size down payment is the borrower bringing in on a purchase? If it’s a refinance how much cash equity does the Borrower have in the property?

Cash Reserves: Does the borrower have adequate cash reserves to cover any unforeseen circumstances that may occur? For example if it’s a construction loan, or renovation project, does the borrower have reserves to cover budget overruns? ”

Number of Projects in Process: How many other projects does your borrower have going that require cash outlay? If a borrower has several other projects or businesses that may require more cash outlay, a lender may be hesitant to do a loan.

Having too many projects going at once that all require cash outlay by a borrower is a red flag because it indicates that a borrower may find him or herself in a cash crunch position.


Most hard money and private money lenders lend to borrowers with poor credit, and many of them do not have a minimum credit score requirement. However, many lenders will require a credit report to mitigate fraud. In higher risk loan transactions, such as value add real estate deals, or construction loans, credit may become a more important factor in loan approval.

Cybersecurity & Fraud:

There are several areas to a loan transaction that can invite fraud. Since everything is done digitally and online these days, it has become harder to prove identities of borrowers. When evaluating a loan opportunity, a lender must be aware of identity theft, whereby someone impersonates a real person and attempts to obtain a loan in that person’s name. A lender must have cybersecurity measures and fraud prevention procedures in place to avoid becoming a victim of this type of fraud.

Additional Risk Factors Hard Money Lenders Consider: 

Legal Compliance:

Adhering to State and Federal laws with your lending practices is crucial to managing risk. Are you complying with usury laws in the jurisdiction where you are making loans? And then what are the disclosure requirements for the type of loan you are making? Do you have to comply with certain standards based on occupancy status, or property use? 

Market Conditions:

Evaluating both the current market conditions and the expected future conditions helps in understanding the potential growth or potential depreciation of the property’s value.

Where are you in a real estate or market cycle? Are interest rates expected to go up, and if so, what interest rate and for what term would be appropriate for a given loan? Are there a lot of properties for sale at the same target price point that your borrower is planning to resell a property you are loaning on?

Exit Strategy: How will you pay the hard money loan back?

Assessing the borrower’s exit strategy—whether it’s selling the property or refinancing—and testing the viability of that exit strategy is critical. What is the borrower’s plan for paying the loan back, and is that a viable plan? Always ask your borrower for a secondary or tertiary exit strategy. Sometimes other information will be required to determine if the borrower’s exit strategy is viable, particularly if the exit strategy is a refinance. If a borrower has poor credit or not enough cash equity, the chance of a refinance as an exit strategy lessens.

Changing State and Local Regulations:

Are there any pending state or local regulations that could affect the property, or the future property use? For example, if the property is a short-term rental, will pending regulations affect the property use in the future, and if so, how will this affect your exit strategy on the loan?

Environmental Considerations:

Does this area have any known environmental issues? Is there a property nearby that could pose future environmental problems such as proximity to a dry cleaners, automotive repair shop, a printing shop, etc.? If the property is located near to a property that has created environmental contamination, it may have also been contaminated.

Changing Flood Maps:

Lenders use flood maps to determine whether flood insurance is required. However these maps are not meant to be predictive and lenders considering whether flood insurance should be required should take into account the overall flood risk to the property. “Maps do not forecast flooding. Maps only reflect past flooding conditions and are a snapshot in time. They do not represent all hazards and do not predict future conditions,” said Michael Grimm, former deputy associate administrator of FEMA’s Federal Insurance and Mitigation Administration.



Grimm also identified the challenge when it comes to mapping flooding from intense and heavy rainfall, which seems to be a by-product of a warming climate.

Grimm said. “What the maps right now are mainly covering are that coastal flood hazard and the riverine flood hazard for larger riverine watersheds. We know that as climate changes, the impacts are getting worse. We’re seeing more and more flooding going on as a result.”

FEMA is required to review a community’s flood maps every 5 years and then decide whether to update them. Insurance rates may change once a flood map change becomes effective. This is a growing concern for lenders as flood maps across the U.S. are changing, or soon to be changing.

Properties that were once located in 500-year floodplains could be named 100-year floodplains. And properties that weren’t previously at risk of flooding are now at risk due to improper drainage infrastructure of the city where the property is located. 

Insurance Availability:

With a changing climate comes also changes to insurance requirements. Some locations that are insurable now may in the future come with higher priced premiums, or become uninsurable altogether.  If you’re doing a refinance, how likely is it that a property you’re lending on may be uninsurable sometime in the future? If you’re loaning on a flip, or new construction, how will the cost and availability of insurance affect the resale of the property?

Lenders will begin to redline certain locations based on the availability, or not, of insurance as the effects of climate warming are fully realized.


A lender must take a disciplined and methodical approach when evaluating a hard money loan opportunity. Because there are so many factors to consider when making a loan, potential lenders should not be lured by the promise of superior returns. This naive approach to private money lending can present some fairly predictable pitfalls that most certainly will turn to losses. 

A property loan is extremely complex because a private money lender must have an understanding of many aspects of the property being used as collateral for the loan, as well as the borrower. A lender must fully understand the legal and regulatory framework, the current and future market conditions, just to name a few. Many private money lenders fail to look at the forest for the trees, as the familiar saying goes. New and inexperienced lenders become so focused on the trees, AKA the loan opportunities, that they fail to see the forest around them. 

For a deeper understanding of hard money loans, check out our Hard Money Video Resources and the Recent Loans Closed section of our website.

Deal Evaluation FAQs

What is a Hard Money Loan?
A hard money loan is primarily asset-based financing provided by a non bank lender.

How quickly can a Hard Money Loan be approved?
Loan approval can be expedited, often within a few days, provided all necessary information is submitted to the lender.

What is the Loan to Value (LTV) ratio in Hard Money Loans?
The LTV ratio is a metric that reflects the loan amount against the value of the property.

What is the significance of the After Repair Value (ARV)?
The ARV is the future value of a fix-and-flip property after renovation.

Are there different types of Hard Money Loans?
Yes, including Fix and Flip Loans, Bridge Loans, and Commercial Bridge Loans.

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Corey Curwick Dutton, MBA Park City, Utah

About the author

Corey Curwick Dutton, MBA Park City, Utah - 2005 MBA Graduate with 10 years experience in Business Management including International Management. Corey is a Private Money Lender and Loan Officer. In her spare time Corey enjoys writing on topics in the private money lending industry. She also enjoys hobbies such as mountain biking and skiing in the great outdoors of Utah.