The hard money loan is a completely different animal than the funding available for you at a local banking institution. The local banks are going to begin work on your creditworthiness first, then scour your credit history down to the last detail. With the hard money loans, those private investors are more likely to be flexible in some areas, so a preapproval can make the process go even faster than usual.
Here is how you get your preapproval for the hard money loan you request;
Know Your Limitations First
When you are new to the real estate industry, don’t assume that investors are going to come running because you have the chance to make a small fortune on a property. Without any track record, you need to slow down and focus your efforts on how to convince a potential investor to take a chance on you. When you are starting a house flipping business and already have a buyer on the hook, don’t get too aggressive with investors because they might not be as excited about this project as you are.
The best thing to do is to analyze your limits and try to work within those parameters until you have more credibility. Don’t give up because you might have no history or assets, persistence and opportunity could peak the interest of an investor who likes to take risks.
Get Your Documents in Order
Getting preapproval for hard money loan is all about the documents you bring to the table. These private investors are interested in one thing, growing their bank accounts, so they need to see that you are going to give them a solid chance to do that with minimal risk on their part. Get an appraisal done on the property, speak with contractors about estimates for work that needs to be done, and show the investors there is a strong demand for the property when repaired.
If you already have a commitment on the table from a buyer, this document alone can be the reason the investors take the chance on you and fund your endeavor. Remember, the investors could always ask for more interest to sweeten the deal and allow them to be more forgiving as far as certain documentation.
Determine the After Repair Value
Having an appraisal of the property now is a start, but these investors want to see how much it will be worth after all the work is completed. Otherwise known as the ARV, the after repair value is the key to securing the monies needed to get the investors to accept your offer. Part of the preapproval process includes showing how the borrowed amount will multiply the value of the property when completed, minus expenses. These investors have their own teams crunching the numbers, so if the borrowed amount doesn’t drive the sale price high enough, they won’t take the chance.
Have third-party appraisal companies determine the ARV for the said property, it will go a long way in helping with the preapproval process. The more profits on the table, the more likely an investor will be interested.
Willingness to Be Flexible
Having made every effort to get approved for the hard money loan, the investor might be close to accepting the offer but needs more from you. This is where the advantage of getting a hard money loan is evident compared to the traditional bank loan. At the bank, the risk department denies the loan and the deal is dead, but with the hard money loan, an eager investor who sees potential might just want you to be more flexible. Perhaps you have little in the way of proven history, so maybe they will allow your residence to be part of the collateral. By leveraging the relationship with an eager investor, you could get by the fact you have little in credit or assets.
There are plenty of hard money investors who would be willing to take a risk on you if you can come to their terms. Your portfolio is the key to getting approval, so if you lack experience and history, bring more to the table. Offer your retire account as part of the bargaining chip, investors who are risk takers might just jump on that opportunity.
Hard Money Loan Approval Conclusion
Even thought it will be easier to get the funding for a hard money loan, it is always best to get things in order now before prospective investors become involved. These investors understand time is money, so if they have to spend a week doing due diligence on your loan when another borrower is preapproved, chances are they will put their money where it can grow faster.
Get the approval first, then approach the private investors ready to make the deal.
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