How to get a hard money loan?
How to get a hard money loan?
How to get a hard money loan you ask? If you are an active real estate investor, builder, or flipper you probably already know how to get a hard money loan. Banks are over regulated and can’t do anything quickly. Hard money loans have evolved into one of the best ways to finance real estate investments. The days of hard money being the loan of last resort are over. Here are some tips on how to get a hard money loan the right way.
To understand “how to get a hard money loan,” you must first know what a hard money lender is. You can find that out by clicking here.
First off, you’ve come to the right place. By that I mean this article will teach you how to get a hard money loan. However, I believe we are the best hard money lender out there so you may have already succeeded! We’re a direct hard money lender which means we lend our own money. That allows us to approve your loan in less than a day, and close in just 2 weeks on average. It’s important you understand what it means to be a direct hard money lender. You want to establish a relationship with the right lender. A lender who doesn’t lend their own funds is just a glorified broker. That could result in you paying higher closing costs, or the loan taking longer than you’d like.
The pandemic brought to light why going to a lender that’s not direct could cost you more than extra fees and time. There were a lot of hard money lenders that were posing as direct lenders. These lenders would close a loan and within a couple days sell it to a 3rd party buyer. When Covid hit, those loan buyers went away, and many hard money lenders lost their funding. What that really meant was borrowers were left without funding to close loans or fund construction draws. Investors lost their deposits because they couldn’t close, construction projects were stalled, and the borrowers had no idea why. I know a lot of borrowers that were negatively affected by this at no fault of their own.
Here are a few things to consider when choosing a hard money lender:
- Do they have a strong online presence or reputation? The hard money lending world is more transparent than ever. Hard money lenders are online most businesses. They may not have sophisticated websites or brand awareness like Rocket Mortgage, but at a minimum they should have a website telling you who they are. You should be able to find reviews or testimonials of successful loans closed.
- Does the lender provide the loan type you are looking for? It’s important to make sure the lender has closed loans like the one you are seeking. Otherwise, it’s a red flag and you should move on.
- Do they know the market? I firmly believe that the best hard money lenders out there have “boots on the ground”. You want a lender that is local and knows the market.
- Which service providers do they use? You want to pick a lender who uses local attorneys, appraisers, and construction inspectors. The national companies are known for being slow and more difficult to work with overall.
How do I apply for a hard money loan?
So how do I get a hard money loan? First you need to have a complete understanding of what type of financing you are looking for. Hard money lenders require far less paperwork than a bank. That doesn’t mean that you can go for a loan without being prepared. Here is a summary of what we need from you in order to be approved for a hard money loan:
- Experience matters. The more experience you have, the less risk there is on our mind. We offer lower rates and more loan proceeds to borrowers that are more experienced. Pretty logical right? Therefore, we ask that each borrower complete an experience worksheet detailing their real estate investments completed over the last 3 years. This is one of the two first time borrower requirements we have.
- Online Application – First time borrowers will need to complete an online application. This really just means we collect high level information on you like email address, contact information etc.
- Know your credit score – We do not run credit until the loan is approved, terms are issued, and you give us authorization to do so. However, we have a minimum credit score requirement, so we’ll want to know your score exceeds that number.
- Purchase & Sale Agreement –Borrowers aren’t preapproved based on their financial condition like they would be at a bank. Therefore, we really can’t process your loan request until we at least know your offer has been accepted. Most lenders won’t move forward with your loan request until you provide a signed purchase and sale agreement.
- Know the market / ARV – Tell them about the area that the property is in. Explain the scope of the renovation and what finish quality will be. Know how much comparable homes have sold for nearby, and what you believe the subject house will sell for post renovation. Hard money lenders are looking to make sure it’s a good investment just like you are. You can always look on zillow.com and realtor.com to do some research, but I suggest you work with a real estate agent. In the end, hard money lenders are asset-based lenders. We care mostly about the value of the collateral.
- Construction Budget- You need to have the construction budget nailed down. Hard money lenders will want a detailed budget of what it will cost to improve the properties value.
- Plans – Plans are required if you are building a house, reconfiguring units, or putting on an addition. Most hard money lenders will need to appraise the property and conclude the ARV (after repair value). Without plans, the appraiser doesn’t know what they are valuing. Not having plans ready could prevent you from a fast approval or a quick close.
Pro tip: When you negotiate the purchase and sale agreement, you need to account for the time it will take to put all this information together. I know it sounds silly but if you can’t get your contractor to finalize a budget for 3 weeks, you can’t offer a 2-week closing timeframe. Give yourself enough time, especially on your first deal. You never want to put your deposit at risk.
A hard money loan is very different than a mortgage or a loan from a conventional lender (bank etc). Hard money usually comes with just a 12 month term, and they don’t collect for taxes and insurance. The mechanics of receiving advances from the construction holdback in itself can be a learning curve. My advice is for you to consult an attorney and review the documents thoroughly on the first loan with a new lender.