When you apply for a typical bank loan, you often get qualified by completing a detailed loan application and agreeing to have the lender review your credit report. The bank will usually provide you with estimated loan terms with a conditional pre-qualification. Essentially, your loan terms are conditional to your ability to comply with all of the lender’s underwriting requirements. The hard money loan process is unique, and the differences begin during the qualification process.
Hard money loan terms are quoted based on the unique attributes of the loan request. Each loan request is individually priced. Hard money lenders do not have a predetermined list of requirements that they can make a quote conditional to. Because of this, you can reasonably expect to provide hard money lenders with a substantial amount of detailed information about various aspects of your loan request upfront to determine interest and terms. Remember that the more accurate and detailed information that you provide initially, the more likely you are to get an accurate quote based on legitimate interest in your loan request. Each loan request is unique, so there is not a specific checklist of documentation that you should include during the qualification process. However, by learning more about general requirements, you can get a better idea about what documentation may be required by your hard money lender.
While traditional banks and credit unions typically require applicants to have a good to excellent credit rating, hard money loans are a financing option available for applicants with lower credit scores. Be aware, however, that hard money loans are not permanent loans. If you have a lower credit score and use a hard money loan for real estate financing, your exit strategy may need to involve selling the property to a qualified buyer at the end of the hard money loan term rather than refinancing the hard money loan with a bank loan.
Applicants need to document that they have sufficient cash available for the down payment and closing costs. Be aware that a typical hard money loan may require at least 35 to 40 percent or more of the sales price as a down payment. Lender fees may also be higher than with a traditional bank loan. As is the case with a traditional bank loan, a hard money lender may require you to document a minimum level of liquid cash reserves available after closing.
These are the primary applicant requirements reviewed. However, information related to your real estate investment experience, your portfolio of investments, your personal income level and more may also be taken into account, and these factors may make your loan request stronger or weaker in various cases.
The property is heavily analyzed during a hard money loan process, but there are not firm requirements for the property. Many hard money lenders only consider specific property types, such as residential or commercial real estate. Therefore, look for a lender that offers financing on the type of loan scenario that you are dealing with. The property’s condition should be carefully outlined, including the need for repair work, the current value or sales price and the occupancy data. Many hard money loans are used to reposition the property in various ways. Because of this, include information about how you plan to reposition the property and what you expect the property value and potential net income to be after the repositioning is complete. The sales contract and any available third-party reports should also be provided to your hard money lender.
Other Important Details
Some applicants will provide vague details regarding their plans to rehab a property, or they may throw unrealistic income projection numbers out for the lender to analyze. Be aware that a hard money lender will typically ask for supporting documentation to confirm your numbers. For example, if you plan to renovate a property, a licensed contractor’s estimate should be provided. If your repositioning plan includes leasing up a multi-tenant property at market rental rates, an analysis of market rents for similar properties should be provided. This should include addresses, unit sizes and other details about the comparable properties that are being used.
Many banks will provide applicants with a checklist of specific items needed for a pre-qualification as well as for final approval. This is because they need to ensure that a loan request meets very specific guidelines that are predetermined. Hard money loans do not have these specific guidelines, so there is not a universal checklist that is given out to all applicants for all loan requests. Instead, the lender will need to see documentation that is specific to your unique loan request. To get a better idea about the type of documentation needed for your loan request, you can reach out to a hard money lender rep to discuss your loan request.