Get a Hard Money Loan Approval

Hard money loans are generally lent to borrowers to finance real estate investment opportunities or other collateral backed loans; they are funded by private investors as opposed to banks. A hard money loan might be an appropriate option if you do not have a high enough credit score to secure a loan from a bank. They are generally used as "bridge" loans between construction financing and long term loans; hard money loans are often used for construction because longterm lenders may want finished and leased projects. Be aware that hard money lenders are not regulated by the Federal Reserve or the Office of Thrift Supervision. Therefore, the application process can be very different from a traditional loan from a bank.

Steps

Finding a Reliable Hard Lender

1. Research appropriate hard lenders in your area. If you are looking for a hard lender because you have been rejected by a bank, then you might be tempted to run to the first hard lender you can find to get your loan quickly. Resist this temptation and do your research first. Some hard lenders are genuinely interested in helping you finance your real estate project, but others are little more than loan sharks. Ask yourself some of the following questions as you are assessing potential lenders:
   • Does this lender have a legitimate web site? Many hard lenders have web sites that are designed to simply gather your information before passing it along to a third party. Avoid these kinds of sites.
   • Is the lender in good standing with its investors? Does the lender have any pending lawsuits from its investors over bad loans or foreclosed properties? If it it does, this can be a warning as to the financial health of the lender.
   • What types of projects has this lender financed in the past? For example, a lender who finances hospitality projects will not generally be comfortable with medical facility loans.
   • Does the lender have a staff member that you can meet and contact? Some hard lenders operate nationally, but you might prefer to find one who operates in your state locally. Many hard lenders will want to see the property you are planning to purchase firsthand.
2. Consider the pros and cons of accepting a hard money loan. Hard money loans are designed to be short-term investments, generally lasting 12 months. Will you be able to refinance this loan in that time frame?
   • Hard money loans also have higher interest rates than long-term loans; their interest rates generally range between 12 and 20 percent. Hard money loans will also include fees and closing costs that must be covered by the borrower.
3. Evaluate the time frame for your loan. Hard money loans are generally granted far more quickly than bank loans. Most banks take longer due to the various requirements for information and the underwriting process, but private lenders can generally grant the loan within two weeks (if not sooner). If you need to finance a real estate project quickly, then a hard money loan can be a good option for you.

Applying for a Hard Money Loan

1. Present the potential value of the property you want to purchase. In a hard money loan, you are financed based on the collateral value of the property, not your personal credit score. That means you will need to present documents such as architectural plans for the property, detailed budgets for construction, and your contractor bid sheets for repairs and renovations. Note that these can apply to commercial projects as well as home buyers.
   • Hard money loans are sometimes given to first time home buyers, but they are commonly granted to developers who want to buy a property and then immediately sell it or refinance it. Hard money lenders want to know that the property and the location are a safe investment.
   • Be prepared to prove the value of the neighborhood and your particular property; what is the price of similar properties in this area? What is the history of the market in this neighborhood? What are its projections for growth? You should have this data available to show your lenders. Websites such as www.zillow.com, www.trulia.com and www.realtor.com can help you find this kind of information.
   • Having a history as a real estate developer will also help your chances for being approved. Show your lenders how you have succeeded in real estate projects in the past.
2. Present a clear financial plan for your home project. Many hard money lenders will fund 60 – 70% of the after-repair-value (ARV) of the home; you will be responsible for funding the additional 30 – 40% of the additional cost. If you have this cash on hand, that will increase your chances of being approved for the loan. If you do not have the money to cover the additional 30 – 40% of the home's value, then the lender might put a lien on another property that you own.
   • Most lenders will prefer that you have 30 – 40% of the additional cost in hand rather than using another loan or a credit card to finance the difference.
   • This generally applies to individual homes, not to large commercial projects.
3. Prepare additional documentation. Although most lenders are concerned with the value of the property you want to buy, they may also ask for your personal financial information. This might include documents such W-2s, paystubs, bank statements and other items in your credit history. You should be prepared to present all of this information to your lenders.
4. Protect yourself legally. Before you sign any paperwork from a hard money lender, review the terms of the loan with your lawyer. Private investors are subjected to very few regulations, so you should make sure your legal interests are protected.
   • If your lender does not disclose any additional fees that might be included in the loan during your repayment schedule, this is a red flag. Be sure to ask if the loan agreement includes all fees. If they also do not include a detailed repayment schedule (including how much interest will accrue and how much of your payment will go toward the interest), then this is also a warning that it might be a bad loan.
   • Speak with your lawyer about the loan's impact on your personal liability. This not always required, depending upon project and the net worth of the borrowing entity, such as a corporation.
5. Remain in constant contact with your lender. Hard money lenders want to see that you're interested in this loan. Return calls promptly and give them the information they need in a timely manner. Hard money lenders keep less capital on hand than banks. If you delay in getting back to a hard money lender, they may lend their assets to another borrower.

Receiving the Loan

1. Move quickly on your investment. Often, a hard money loan is granted for a property that will not be on the market for very long. You should have all of your documentation correctly lined up so you can quickly put the loan to use. You should also give all of your team — from your construction workers to your designers — a clear time frame of when they will need to act. You will most likely need to sell the house within a year, so you will need to be efficient.
2. Prepare to cover an closing costs or additional underwriting fees for the loan. Often, hard money loans will require you to pay these additional costs in order to move forward with the loan. You should have the money in place to finance these costs.
3. Secure property insurance. Many hard money lenders will require that the borrower provide property insurance to cover any damage done to the property during renovation/repair. It will generally be cheaper if you can bundle your property insurance with a company you are already using for car insurance or life insurance.
   • If you are using a realtor to purchase the home, they can also recommend sources for affordable property insurance.
4. Pay back the loan. Most hard money loans are designed to be paid back quickly, usually within 12 months. If you do not pay back the loan in time, then the lender might be liable to take your home as collateral. To avoid this, make sure you can easily afford the repayment schedule you stipulate in your loan agreement.
   • Most hard money loans stipulate that you will repay the loan in one large payment after the house sells; this single payment will cover the principle on the loan as well as the interest.

Tips

• Recent data has shown that hard money loans are frequently being used to renovate homes in the high-end real estate market.

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Sources and Citations

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