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.