When you think about applying for a traditional bank loan, you may think about having to provide a lender with a huge stack of documentation. In fact, with some loan processes, it may seem like you are constantly providing the lender with new information to fulfill a seemingly endless number of requests for more documentation. If you are new to the hard money loan experience, you understandably want to know if you should be prepared to deal with this incredibly stressful lending experience once again.
The good news is that the amount of documentation that is required for a hard money loan is usually much less significant than with a traditional bank loan. However, remember that hard money loans are usually used for unique lending situations that do not fall within the lending parameters of a traditional loan. With this in mind, you can reasonably expect a hard money lender to require some documentation regarding the unique attributes of your specific loan request. These are some of the more specific types of documentation that you may be expected to provide to your hard money lender.
Many hard money loans are used to purchase real estate. Because of this, applicants must make a down payment on the property. Depending on the property type and the overall loan scenario, it is common for a hard money loan to require as much as 35 to 40 percent of the sales price. Therefore, one of the requirements that many hard money lenders have is that you provide bank statements that document your liquid assets. Some hard money lenders also require you to document a cash reserve that will remain after the down payment and closing costs. Remember hard money loan fees and closing costs may be higher than with a traditional bank loan.
The lender will typically ask for some documentation regarding personal income. A credit report may also be reviewed. However, the credit score requirements for a hard money loan are relatively minimal in most cases. Some hard money lenders do not have a minimum credit score requirement at all, and they look at the full picture of the loan scenario overall to determine loan approval status.
Hard money loans are short-term loans secured by real estate. They are available for both commercial and residential properties, but some hard money lenders only lend on one type of property. Because the loans are collateralized by real estate, documentation regarding the property is critical for many hard money loans. Hard money loans are typically used to finance the repositioning of a property in some way. For example, the money may be used to develop land, to rehabilitate an existing property or even to improve operating income numbers in some way. These steps are usually taken with funding from a hard money loan so that the property can qualify for traditional bank financing within a few months or years. Another exit strategy is for the property to be sold after the repositioning process has been completed.
Therefore, property documentation related its current condition may be needed. If the hard money loan request is for a purchase, a sales contract and proof of earnest money may be required. In most cases, a title commitment is also required before the loan can close.
Each hard money loan request is unique, so the loan-specific documentation will vary. If the property needs to be renovated, documentation related to its current condition and cost to complete the renovation may be required. Typically, a statement from a contractor may suffice for this. If part of the scenario involves selling the property after a renovation, an analysis of comparable properties that have recently been renovated should be provided. If the scenario involves increasing occupancy at current rental rates after a renovation, market rental rate data should be provided. This may sound like a tremendous amount of information, but most investors have already done this research as part of the vetting process for their selection of an investment. After all, you need to ensure that you can reasonably turn a good profit from the project, and research is critical for this. Your own research may be provided to satisfy the hard money lender’s requirements in many cases.
It may seem like the documentation required for a hard money loan can be significant, but keep in mind that the documentation required is usually limited in comparison to a traditional bank loan. In addition, the overall loan process for a hard money loan may only take a few weeks or less. This is in comparison to several months that may be required for a traditional bank loan to be reviewed and funded. To determine what specific documents are required for your hard money loan request, reach out to your loan representative.
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