Who Funds Hard Money Loans?

Before we discuss who is funding the hard money loans, it is important that you have a full understanding of what these loans entail. Unlike the traditional loans you can get at the local bank, the hard money loans are easier to get but you should be aware of the good and the bad before jumping in with both feet. The hard money loan is also referred to as a bridge loan, basically fast money used for a number of financial investments. This is the preferred loan for real estate developers and house flippers, but it is gaining popularity in smaller circles too.

Let’s discuss more about the hard money loans and who is funding these type of short-term lending instruments.

Who Funds Hard Money Loans?
The hard money loan is unique in and of itself because it is funded by private investors. Instead of going to the neighborhood financial institution, investors will be bidding on your financial request. Because the bank is removed from the equation, the terms of the loan will be determined by these private investors who are looking for nothing more that a quick profit on their money. Instead of leaving their cash in the bank to grow at one percent a year, they can put it up by way of the hard money loan and get a huge return on their investment in less time.

Speak with your local realtors about the best way to reach out to these investors in your area so you can apply for the hard money loan on your own. There are investors all over the country looking for a quick return on their capital.

Criteria To Get Approval for Hard Money Loans
Whether you are looking to renovate a property to sell or are flipping a house in a month, the investors for the hard money loans are looking at your ability to pay back the loan. It doesn’t matter what project you have lined up and the need for the cash, getting approval for the hard money loan is not going to be based on your creditworthiness. The hard money lender looks at the value of the property itself and considers the ARV, or after repair value.

By determining what the property is valued at after the repair, the investor can better determine if the loan is worth the risk. Accuracy with property value and sale date help move the loan process along easier.

The Cons of the Hard Money Loans
Although the hard money loan is not the perfect lending solution for those in need of quick cash, it is fast and convenient. That being said, there is a price to pay for that convenience, and it comes in the way of a slightly higher interest rate. Although higher than a conventional loan, the money can be paid back long before a local bank even decides if the borrower is worthy. The terms of the hard money loan are shorter because these private investors want to see a return fast.

When the borrower has a clear understanding of when this property is going to be profitable, then paying back the loan with shorter terms is usually not an issue.

The Pros of the Hard Money Loans
The benefits of the hard money loan are numerous. Not dealing with the endless hoops to jump through at the bank is usually enough, but borrowers love the convenience of these type loans. Instead of waiting months for the bank to fund a traditional loan, investors provide funding for hard money loans in weeks. That can be huge when timelines for projects come into play. Another benefit of the hard money loan is the flexibility of the terms. Private lenders are more likely to negotiate and allow wiggle room for the borrower, tailoring the repayment schedule to their needs.

The one thing these investors are really concerned about is the collateral, and that is usually the property itself. These private lenders often allow a bit of leeway with the collateral too, attaching unique terms you couldn’t find in a traditional loan. If the lender feels the property value is overstated, they may simply ask the borrower to secure their residential property or retirement account as part of the collateral.

Bottom Line With Hard Money Loans
When you need capital in a pinch and don’t have the time or patience to jump throw the endless hoops at the local bank, the hard money loan may be the perfect fit. If you need funding fast and don’t need the aggravation of miles of red tape, just be aware of the fine details of the loan.

If you’re comfortable with the interest rate, loan terms, and fees, this might be the perfect financial vehicle for your needs.

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What Due Diligence Information Do Hard Money Lenders Require?

Just because it is easier to secure funding for hard money loans because you are dealing with private investors, doesn’t mean the money is available without any strings. In order to secure the short-term funding, these investors are going to be looking for some information to convince them they should invest in your endeavor. Once your ducks are in a row, the entire loan process can take weeks compared to the several months you would have been waiting at the local financial institution.

Here is some information concerning the due diligence information the hard money lenders may require;

The Reason for the Hard Money Loan
When you apply for a traditional loan at the local back, the reason you are borrowing the money is only one of many questions the risk department will be concerned with. With hard money loans, these private investors have one real concern, the reason you need their money. Perhaps you are a house flipper and you already have a buyer lined up but you need to spend a considerable amount of money in order to bring the house to compliance. Whether you are flipping or a real estate developer who has a short deadline approaching, it is important to be open with these investors at the start concerning your intent for their money.

Preparing documentation that shows you already have buyers lined up for the property and the wheels are already in motion can go a long way in allowing the investors the piece of mind they need in order to put out the cash.

The Value of the Property in Question
It really doesn’t matter if you are renovating a single family home or you have a small strip mall under development, the hard money investors are simply concerned with the value of the property. If you are looking to a secure a $500,000 loan on property worth $400,000, it will be a tough go convincing anyone to take that risk. If you need $900,000 and already have a buyer lined up to sell the property for $2,000,000 after renovation, these investors want to see proof.

Take the time and provide the investor this due diligence information so that they can have peace of mind and be more inclined to cut the check. The more details and solid your information about the ARV, after repair value, the easier it will be to secure the hard money loan.

Documentation on Completion of Restoration
When it comes to providing the hard money investors information, nothing will be more important that the ARV, after repair value. If the property is worth $300,000 today, but will be worth $900,000 after the funding, then these investors can determine if it is worth the risk. Loaning a quarter million on a property that will be worth more than triple than that after repairs is a sound investment, but more than your word will be required. Take the time before applying for the hard money loan to gather documents that show the value of the property as is today, what the costs will be to the penny to make the repairs, and the appraisal of the said property when work is completed.

When these documents are in order and presented to the investor, it will be more likely they will release the funding quickly to help you to close the deal.

Ability to Provide Additional Collateral
Even after providing the investors with the ARV, they may still be a little apprehensive to float the hard money loan. After doing their due diligence, perhaps they are close to making the deal but need more collateral. Perhaps after reviewing the numbers, they feel the value of the property might be a little too high, but to compensate for the overage, they will consider modifying the terms of the agreement. In order to secure the loan, included with the value of the property may also be your residence or your retirement account as further collateral.

When you are confident that the monies for the repaired property will more than cover the hard loan, then giving the investors piece of mind by upping that collateral might be a small price to pay to get funding quickly. If you are willing to include other collateral, these investors will usually go ahead with the hard money loan.

Hard Money Lending Conclusion
Although the benefits to securing hard money loans are numerous, there is some due diligence necessary to put the mind of the investors at ease. These investors are not frugal with their capital, they have specific needs in order to provide the bridge loans borrowers need. 

Take the time to secure all the necessary documentation and the investors should be in the best position to providing the funding in short order.

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When does the refinance process begin on a Landlord loan and how long does the process take?

When you’re looking to refinance your investment property, chances are that you need the money sooner rather that later. The actually refinancing process itself can range from three days for a Fast Track refinance to several months if your situation is complicated. You can shorten the time it takes to gain approval by doing a little work before you apply. 

Laying the Groundwork – one hour to several months, depending on the state of your credit

The place to start the process is with your credit report. Many people looking to refinance are looking to get more favorable rates and terms, and that takes good credit. You can get one free credit report per year from the big three reporting agencies, Experion, Equifax, and TransUnion. You’re looking for:

– Your FICO score
– Any inaccuracies in your personal information
– Any inaccuracies in your credit history

If your FICO score is 750 or above, you’re in good shape. A lower score means you need to takes steps to raise it. Pay down any credit card accounts, but don’t pay them off completely or close them. Lenders want to see open, active accounts that are current, with a low balance relative to your credit limit.

Any inaccuracies should be addressed. If you have a late payment history, and the payments are current, appeal directly to the creditor to have them removed from reporting. Try to clear up any defaults or judgments, and pay off any accounts that are in collection.

Getting Your Paperwork Together – this shouldn’t take any longer than a day or two.

Once you have your credit report in good shape, it’s time to gather any documents that a lender might need. All of these may not be necessary, but it’s better to have them at hand than to hit delays while you get it together. Get a folder and fill it with:

– One month’s worth of pay stubs or proof of other income
– W-2s for the previous two years
– At least two previous months of bank account, retirement account, and investment account statements
– Current proof of homeowners’ insurance
– Most current mortgage statement
– Discharge papers, if you’ve ever filed bankruptcy
– Letter of explanation for any credit issues you were unable to clear

It’s also a good idea to have a list of questions to ask prospective lenders. You want to know what type of loan products they offer and if they have any programs for landlords or those who own investment properties. You should also be prepared to discuss your specific goals or reasons for wanting a refinance. 

Applying for Refinancing – this can be done in one day, if you have a lender and have all of your paperwork in order.

This process can be done either by going to local lenders or shopping for a refinance online. Some online lenders can give you approval within 24-hours. Whichever avenue you choose when you decide on a lender, make sure that your application is filled out completely and accurately, and that all information matches your documentation. Check to make sure that no other information is needed.

The Final Steps – these can vary by circumstance and lender

You’ll need to have an appraisal done so the lender knows that value of the property. If you’ve had an appraisal within the previous six months, this should be good enough. Having an appraisal done before you apply for a refinance will save even more time. It could take up to a week to get an appraisal scheduled, depending on the appraiser’s availability. Make sure that your home is in the best possible shape beforehand.

The next step will be for the lender to send your application to an underwriter for final approval. Some lender’s underwrite their own loans, so choosing one that does reduces even more time toward final approval. You should receive confirmation within a few days to a week if everything is in order with your application. Then, you’ll be issued a notice of approval with the loan amount and terms. 

If you’re satisfied with the terms and the loan company needs no further information, the only thing left to do is lock in an interest rates and sign the loan documents. The funds will be used by the closing agent to pay off your outstanding loan, and you’ll receive a new mortgage. You should be ready to close on the loan within a few days after it’s filed.

You could say that the refinance process falls in two parts, one directed by you, the other by the lender. Having title to a property that you can use as collateral isn’t enough to qualify you for a refinance. You can increase your chances of approval and get your loan processed faster by being prepared before finding a lender.

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Different Types of Loan Guarantees

The Need for Full Recourse

If a loan is business related and it is also a hard loan, it will also probably need to be a full recourse loan. As a part of this full recourse definition, the lender of hard money will likely require a personal guarantee from the borrower. When both of these conditions are met, the lender can be sure that you, the borrower, are more invested in the project. This practice is also known as “putting skin in the game,” and it is quite common among lenders and borrowers in this situation.

The full recourse loan and the guaranteed loan are distinct financial instruments. They are also defined differently from a legal standpoint. If a loan is funded by private monies, it can be either full recourse or non recourse.

The loan that is full recourse allows the lender to pursue the borrower by collecting on other assets in case of a default or a partial non payment. A borrower does have a defense against this – he or she can title assets using other names in order to guard against full recourse.

Full Recourse Without a Personal Guarantee

If a borrower invests in a full recourse loan without a personal guarantee, the borrower must protect assets under another name in order to shield those assets from lien or lawsuit. Full recourse does mean that a borrower takes full responsibility for a loan, which means that all assets that are tied to that borrower are up for grabs.

Full Recourse Without a Personal Guarantee

A borrower may also use an outside entity such as an LLC to borrow. Even if this LLC takes on a full recourse loan, the borrower is protected against any seizure or action against assets that are outside of that LLC. Because the LLC is a business entity, it cannot give a personal guarantee. It is almost as if someone else is borrowing the money.

Because of the LLC shield and other protections that borrowers may have, many lenders do not allow LLCs to borrow money. They may also require a personal guarantee, which means a borrower cannot use an LLC to borrow in the first place.

The Different Kinds of Guarantees

Not all guarantees are the same. There are many different kinds – the unlimited personal guarantee, the limited personal guarantee, and the conditional personal guarantee.

The unlimited personal guarantee means that there is no limit on the amount of money that a lender can collect in reference to a loan. If the lender has to take the borrower to court in order to receive pay back, the borrower would be responsible for the legal fees as well as the interest that would accrue. If there were any other costs that were associated with the loan, the borrower would pay those as well.

A limited personal guarantee sets an arbitrary limit on the amount of personal liability that a borrower takes on. This type of guarantee is most useful with loans that involve more than one company shareholder. However, most limited personal guarantee contracts will contain a clause that converts a limited personal guarantee into an unlimited personal guarantee in the case of fraud. This clause is also known as a “bad boy” clause.

A conditional personal guarantee is not always valid unless there is a certain trigger event that takes place. For instance, if a loan has a low loan to value metric and the borrower is not taking on a great deal of risk, the guarantee may only become valid if certain conditions are not met.

Enforcing a Guarantee

No matter what type of a guarantee is agreed to, the party in charge of enforcing it may change. A lender has the right to sell a contract to a third party at will in most cases. Just because ownership of a lending contract changes does not change the terms of the agreement.

The terms within a loan contract may be enforced with more fervor if the loan is sold to a third party that does not know the borrower, however. This is why many borrowers try to enforce a clause that the loan may not be sold.

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Are banks statements and financial documents required for a hard money loan

If you are thinking about applying for a hard money loan, you may be happy about the fact that many hard money lenders have a faster and generally easier overall loan process. In fact, a hard money loan may close several weeks or more faster than a traditional bank loan would. With this in mind, some potential applicants believe that less documentation is required by a private investor or hard money lender for loan approval and funding. For example, you may assume that a hard money lender will not ask for supporting bank statements or other financial documents. While this assumption is common with those who have never applied for a loan with a hard money lender, this is usually a false assumption. A closer look at this requirement and why it is in place can help you to better understand the hard money lending process in general.

Each Loan Request Is Unique
When you apply for a traditional bank loan, you are typically provided with a standard checklist of documentation that is required for each loan. Bank loans are typically “cookie cutter” financing options by design, but hard money loans are different. In most cases, lending scenarios that do not fall into the traditional bank loan’s guidelines are considered for hard money loans. This includes many very unique situations. Essentially, while most bank loans are more or less the same in many ways, most hard money loan scenarios are individualized. It is not generally reasonable to make blanket statements about hard money loans always having specific requirements because of how unique each loan scenario is. 

Lenders Have Varying Requirements
You also should be aware that hard money lenders are either private lending companies or individual investors. These are companies or people who are pledging their own funds as your loan money. Typically, these are financially savvy individuals, and they often have their own unique comfort level with different types of scenarios. Documentation that they request is designed to help them analyze your unique loan scenario and to help them reach a comfort level necessary so that they can lend you the money that you need. However, because each lending company and investor is unique, each lender has different requirements. Some may suffice with reviewing one month of bank statements, and others may want to see three or four months of bank statements. Some may accept a gift of funds from a family member, and others may not.

Why Bank Statements and Financial Documents Are Commonly Required
Most hard money loans have a much lower loan-to-value than most traditional bank loans. All lenders typically want to see that you have enough available cash on hand to pay for the down payment as well as the closing costs. Some also have a post-closing cash reserve requirement. Bank statements are usually requested by a lender to see where the down payment money is coming from and to ensure that borrowed funds are not being used for the down payment.

In addition, financial statements that support personal and business numbers may also be required so that the lender can ensure that the applicant properly manages his or her funds and has substantial income to support personal debts. While hard money loans are use to finance unique property situations, investors want to ensure that the applicant is financially secure. However, there may be instances when the exact documentation that an investor needs to see is not available. Hard money lenders are more flexible to creativity during the lending process than traditional banks are. Being open and honest upfront about why some documentation may not be available or about where down payment funds are coming from may help you to find a hard money lender who is more agreeable to your unique financial situation. 

Hard money lenders are each unique, and they do not conform to a specific set rigid requirements. While bank statements and financial documents are not firm requirements in all cases for a hard money loan, they do provide hard money lenders and investors with the peace of mind that they need to comfortably make a financing decision. With the flexibility associated with hard money loans, however, there is room to maneuver around this requirement when there is a solid reason for it and when there are compensating circumstances. If your documents are not available or if you are concerned about potential issues with the numbers in them, discuss the issue upfront to find a hard money lender who may be agreeable to your situation.

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How Will an Appraisal Affect a Hard Money Loan?

Unlike the traditional loans from a conventional bank, the lending requirements are few and far between with hard money loans. Although there are only a few requirements, much of the weight in the approval process rests more heavily on the appraisal. If you are in need of funding to flip a home or invest in commercial property, you want to make certain your appraisal comes back correct.

Here is how the appraisal will affect the hard money loan;

The Hard Money Loan Process
Imagine needing cash to flip a property next month or to invest in a string of commercial properties ready for development. When time is money, the last thing that you want to do is to sit with a branch manager at the local financial institution. Not only will you be required to have your credit scores and history gone over with a fine-toothed comb, but the risk department will need weeks if not months to even consider your application. By the time they make any determination, your opportunity will be long gone.

This is where the hard money loan comes in, the perfect choice for borrowers who need funding fast. The most important factor in determining if you qualify is providing the investors an appraisal on said property.

The After Repair Value of Property
While the local financial institution is concerned about your credit worthiness and all the dings on your credit history since you were a teenager, the hard money investors are focused on two things. They want to know the value of the property now and the after repair value, known as the ARV. This is a huge determining factor for investors, because if the appraisal shows the property will be worth significantly more after the loan and work is completed, they are more likely to move forward with the funding.

Regardless if you have plans to complete a strip mall by next season or you have a buyer lined up after you flip a house, the after repair value must be significant so the investor feels they are in the best position to get their money back plus interest in the agreed upon time.

Making Certain the Numbers Match
It might be one thing to approach a lending institution and be in a position to work the numbers so they might fit, this is more challenging with the hard money loans. The local bank will be looking and a number of factors to rate your eligibility, but with the hard money loan investor they are placing most of their decision based on the appraisal. There really is no room to get it wrong here, so extra care should be taken to have a qualified team appraise the property now, determine the exact cost to make repairs, and the value after the work has been completed.

Make no mistake about it, investors have a team at the ready to go over those number to the letter. If you are not accurately representing the values across the board, it could be the reason the investors walk away. The most important thing to do is to simply represent your financial needs accurately so the investors can trust you, the rest will simply fall into place.

Meeting the Investors Part of the Way
Let’s assume that you provided the investors for the hard money loan all the appraisal information they needed. Let us also assume that after they carefully reviewed the numbers, the gap is too close for them to make the investment. Because you accurately represented yourself and your needs, the investors may be willing to afford a little leeway here in order to complete the deal. Since you made a solid effort to represent the numbers as they were, these investors can come up with some creative ways that allow you to meet them part of the way while helping them feel confident in the deal at the same time.

Depending on how far away the numbers or the comfort level of each investor, creativity and your compliance will certainly play a part in how much flexibility they have. Perhaps the investor is ready to deal, but they want you to put up your home residence as part of the collateral. Some investors might ask you put your retirement account on the line as part of the deal, so be prepared for creative alternatives if the investor wants to make a deal.

Hard Money Loan Appraisal Conclusion
Since so much is riding on the appraisal of the property in question, it is important to make certain the numbers match up before requesting investors fund your endeavor. These investors are very savvy with their money, so they are going to eventually request the appraisal in order to make the determination if this risk is something they would consider.

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How long does a hard money loan take to close?

There are instances when loan applicants need to close quickly. For example, you may need to follow through on a 1031 exchange in order to avoid a huge tax bill, and your window for acting accordingly is rapidly closing. Perhaps have a balloon payment due on your mortgage and you waited a bit too long to start looking for a replacement loan. You may have an excellent real estate deal available to you, but the seller may not be willing to wait a few months for a traditional loan to go through. In these situations, timing is critical, and you stand to lose a huge amount of money in different ways with each scenario. Remember that these are only a few of many real estate scenarios where a traditional bank loan’s processing time is not ideal or is simply not acceptable. 

You may have heard that a hard money loan has a very fast turnaround time, but exactly how long is this? The reality is that it varies based on several important factors. Some hard money loans will take three to four weeks to close, and others may close within the next few days. 

The Lender
One of the first factors that influences the timeline of your loan request’s approval and funding is the lender that you choose to work with. In most cases, you will enjoy a faster overall experience when you work with a direct lender or investor. Some companies position themselves to appear as a direct lender, but they actually function in a brokerage role by actively searching for a hard money investor interested in your project after you submit a full loan request. As you might imagine, the fact that a broker needs to search for an interested investor can add unnecessary time to the timeframe. 

In addition, each lender has a different requirement regarding third party reports and market research. Some will accept an appraisal that was not prepared specifically for them, and this can save a substantial amount of time and money. Remember that most traditional financial institutions need an appraisal and other third-party reports prepared for them. The use of an existing appraisal may not be possible, or it may need to be updated. This takes time and costs additional money.

Regardless of the lender who you choose to work with, your closing date will typically be subject to the title company’s efforts. A clear title is generally a requirement regardless of the type of financing that you use. The fastest turnaround time that you could reasonably accept as a quote is five to seven days, and this may only be possible when you have a complete loan package ready to submit to the hard money lender. 

The Specifics of the Loan Request
Another factor that will affect the timeline for your closing relates to your specific loan request. Some hard money lenders want to physically visit the property before funding a loan. If you work with a local lender, there is usually not a delay for this. If your lender needs to make travel arrangements, this can add time to the process. 

Hard money lenders generally also want to review your personal financial documents, entity documents if you are applying under a partnership or another entity and property-related documents. Specific loan requests may also generate the need for other documents that could take additional time for you to obtain and for the lender to review. For example, when you are applying for a loan on an apartment building that has been run into the ground because of poor management, you will need to identify a new management company to use. That management company will need to create a plan to turn the property around. It may also need to provide a resume and other documents showing its credibility. 

Each loan request is unique. Because some loan requests are more specialized in different ways than others, additional reports or documentation that takes time to obtain may be required. 

Your Responsiveness
Regardless of the type of loan that you apply for, the general timeline is based on how fast the lender can work as well as on how fast the borrower can provide documentation requested. In many cases, the lender’s side may be on hold until the borrower provides documentation. With this in mind, the borrower’s responsiveness is critical to the overall timeline regardless of the lender that you choose to work with. 

With some loan requests, an applicant for a hard money loan has already applied for a traditional loan and may have been turned down. This applicant may have a full loan package put together. All information required by a hard money lender may be ready to hand over to the lender immediately. When this is possible and when no additional reports need to be ordered, the hard money loan can typically close within the fastest time period possible. 

As you can see, there are many factors that affect the overall loan process. If your loan request is time-sensitive, it makes sense to ask about timing before committing to a lender. In addition, plan to be as responsive as possible to requests for documentation.

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