Many of your financial needs over the years can be satisfied through traditional loan programs offered by institutional lenders, such as a local credit union, a national bank or another similar type of financial institution. These lenders typically have very stringent underwriting guidelines that give them no wiggle room to think outside the box. The reality, however, is that many loan requests do not fit inside their predetermined box. These loan requests may have strong merit in unique ways even if all aspects of the loan request do not qualify for a financial institution’s specific requirements.
This is where hard money lenders come into the picture. Financial institutions are not the only option when you are looking for financing. Private lenders and investors can also provide you with the money that you need. Generally, you can expect more creative approaches to reviewing loan requests through hard money lenders. However, because these loans tend to be more creative and individually structured, you can also expect a hard money loan to have a higher interest rate and a shorter loan term. Essentially, hard money loans are used for a short period of time so that you can reposition the property or your personal qualifications to qualify for a traditional financing program. If you believe that a hard money loan is right for you, you can walk through these steps to get the financing that you need.
Research Hard Money Lenders
Many people who are thinking about applying for a hard money loan have already received at least one rejection from an institutional investor. This can create a type of desperation that results in some applicants turning to the first hard money lender that shows interest in their loan request. However, remember that hard money loans are not regulated by the government. While some are very reputable, others are not. Look for a direct lender rather than an intermediary. When you read the fine print on their website, you likely can determine if they are offering their own funds for not. Look for a company that has a professional website as well as a dedicated business address. You may even look at a Google street view image of the address to ensure that the business is legitimate.
Take the additional steps of reviewing the company’s Better Business Bureau rating and reading consumer reviews. While there is always a chance that one or two deals in the past went wayside, numerous bad reviews should be a red flag. Another step to take is to contact the office by phone at different times during business hours. Of course, have legitimate reasons for calling. Ensure that the phone is always answered professionally. Be wary of a hard money lender whose phone always rolls to voicemail.
Prepare a Loan Request Package
After you find a few reputable hard money lenders to potentially apply for your loan with, you will initially contact them by phone or email to discuss your project and to determine their interest level. Some may be able to tell just by speaking with you that your loan request is not something that they will be able to help you with. Others may give you confidence to proceed with the next step. For hard money lenders that have expressed interest in learning more about your loan request, send them a detailed loan package.
A loan package will not have your bank statements, credit report, tax returns or other personal financial information in most cases. However, it will have a write-up or outline of your loan request. It will also highlight the current condition of the property, its tenancy issues or other concerns that you plan to address with financing. You need to show that you have a legitimate way to turn the property around in some cases. This should ideally be supported by market research. For example, if an issue is low occupancy because the property is in poor condition, your write-up will include information about how the loan funds will be used specifically to improve property condition. It will also include a current rent roll and projected numbers based on market level occupancy. Remember to include time in your plan for the property’s occupancy rates to increase.
After you submit a loan request package to a few lenders, they will be able to better determine their interest. If they decide to proceed with your loan request, you may receive preliminary loan terms up-front as well as a list of documents that may be required to complete the loan application. Remember that a hard money loan timeline is usually expedited in comparison to a traditional financial institution loan timeline. However, you will still need to give the hard money lender all of the documentation needed for them to make a final decision about your loan request.