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Hard Money Rules: The four-legged Stool

posted Aug 8, 2011, 2:10 PM by Massey Kouhssari

Underwriting a hard money loan is like a four-legged stool. You say, “What could possibly be the correlation between a stool and underwriting a hard money loan?”

The four legs of a stool represent the core factors in underwriting a hard money loan:

  • Collateral (Security – The property securing the note.)
  • Skin (Borrowers own Cash into the transaction.)
  • Story (The story that gave rise to the need for the loan.)
  • Exit Strategy (A realistic detail of how the loan will be paid off at maturity.)

When all four legs are the same length and sturdy, the stool works fine. But imagine a four-legged stool with one short leg or with one leg missing. Whether a short or missing fourth leg, the structural integrity of the stool has become compromise and may eventually fail.

Likewise, when all four core factors of underwriting are present and satisfactory, the success of the loan is maximized. However, if one of the four core factors of underwriting is weak or non-existent, the loan may be doomed.

Understanding the four legs to a hard money underwriting stool are key to improving and increasing the odds of securing loan approval - but not guarantee it.