What's a letter of intent?
Once you’ve found an investment opportunity that has the potential to make you money, and you’ve come to an agreement with your lender on a hard money loan, you’ll need to think about the paperwork. A private money loan, like a conventional bank loan, requires proper documentation. You’ll need a promissory note (which is a promise, in writing, to repay a certain amount of money according to a set of specific terms) as well as documentation for the property to be used as collateral (such as a mortgage). You may also need an appraisal or inspection. One of the most important pieces of paperwork you’ll need before your hard money loan process is complete is the letter of intent (LOI). The LOI is one of the standard documents associated with every hard money loan transaction.
Definition of a Letter of Intent
If you have equity in a property that you can uses as collateral, and the deal makes sense to your lender, they will issue you a letter of intent. The letter of intent is a formal document that outlines the terms between two (or more) parties before an agreement is finalized. It is a written commitment to fund a hard money loan on particular terms and to secure that loan against a certain property after all the underwriting conditions have been met. The property you are using to secure your loan will need to meet the lender’s criteria for underwriting. These criteria generally include the following:
1. A satisfactory appraisal of the property in question.
2. A clear title to the property you are using to secure your loan.
3. Property insurance, to make sure the value of your real estate doesn’t go up in smoke.
The Purpose of a Letter of Intent
The purpose of the letter of intent is to ensure that all the parties to the hard money loan understand the terms of the loan, that they are “on the same page,” so to speak. It is used to eliminate the possibility of any misunderstandings that can occur during a merely verbal exchange
The letter of intent is not legally binding, but it does provide important clarification. Furthermore, hard money loans are generally closed within mere days of issuing a letter of intent, so it is not likely your terms will change.
The Letter of Intent vs. the Proof of Funds Letter
The letter of intent (LOI) should not be confused with the proof of fund (POF) letter. A proof of funds letter, unlike an LOI, is not specific to a particular transaction, and it is not a commitment to fund a loan. The proof of funds is a signed letter from the private money loan provider. It informs the seller of a property of the buyer’s ability to fund the purchase. You will also likely need a proof of funds letter as part of your paperwork, but it is not the same thing as a letter of intent.
The Content of a Letter of Intent
As previously mentioned, the letter of intent will spell out the terms of your hard money loan. Your lender will consider the personal information you have provided them during the loan discussion process before issuing an LOI.
In addition to naming the parties involved, the letter of intent will include the following information:
1. The total amount of your loan.
2. The duration of your loan. (Hard money loans are typically short-term.)
3. The interest rate you will be paying. (The interest rate on a hard money loan is usually higher than that of a conventional loan.)
4. The points on the loan. These are fees paid in exchange for a reduced interest rate. On hard money loans, they typically range from two to four percent of the value of the loan.
5. Any other closing costs connected with the loan.
6. Any other specific terms of the loan.
Securing a Letter of Intent
Now that you understand the purpose of the letter of intent, you’ll want to make sure that you secure one. A trustworthy private money lender will not leave you without this important document, which spells out the terms of your hard money loan. Having these terms outlined in writing will help all parties involved to avoid any misunderstanding.