A Step-By-Step Guide to the Hard Money Lending Process

Written by Posted On Tuesday, 25 April 2017 14:57
A Step-By-Step Guide to the Hard Money Lending Process Getty Images

There are many real estate investors or potential real estate investors who understand what a hard money loan is and they think that it may be the right financing choice for them. However, they don’t know where to start.

A hard money loan is a private lending alternative for real estate investors. The loan is financed by private investors and the property serves as collateral. Many investors prefer hard money loans to traditional loans because they are short-term, flexible, and can be funded quickly.

Your first step to getting a hard money loan is to determine what your goals are. One of the best features of a hard money loan is that it is very flexible and can be tailored to your specific goals and projects. When it comes time to present your project to a hard money lender, you will need to provide all of the details of the property including the address, purchase price, renovation budget, and your projected asking price. Are you planning to flip the property? Do you have a contractor? How much money will it cost? When do you expect the renovations to be completed? These are all questions that you should have the answers to before you apply for a loan.

Next, you will need to find a hard money lender. How do you do that? The best way is to speak to other investors about their experiences with hard money lenders in the past. You can do this by going to local real estate clubs and events in your area. Knowing which hard money lenders are the most popular among other house flippers will help you determine who you should work with.

When you find the hard money lender that you want to work with, you’re ready to start the process. This process can vary depending on the lender but here is what you can expect. You will go through the pre-qualification process. Basically this means that the lender will do some research on you and the property. Unlike traditional lenders, hard money lenders are not really concerned with the credit scores and finances of the borrower. Since hard money loans are secured by real estate, they are mostly concerned with the value of the property which will serve as collateral.

Next, you will fill out an application for the loan. You will authorize the lender to look at your credit and proof of income and employment. As stated above, credit scores and financial stability is not the most important aspect in the eyes of the lender but it will be taken into consideration. This is the first of many reasons why finding a good and reputable hard money lender is important. The hard money lender should be aware of your goals and how the loan will help you to reach them. If your loan application is approved, you will be working as a team with the lender and you want to makes sure that they are on your side. If the lender is not concerned with your priorities, needs, and goals, they aren’t going to make a very good partner down the road.

Once the application is filled out, it goes through processing. Basically the processor will determine if the proper paperwork and documentation are accurate. Once the application is processed, it goes on to the underwriter. What the underwriter does is simple: they assess the risk in the loan. They determine whether or not the loan can be approved based on the value of the property, your capacity to pay, and your credit, the value of the property serving as collateral, however, being most important.

The next step, hopefully, is the approval of the loan. The lender will supply you with a letter that will include all information about terms, payment, closing costs, etc. After the approval, the closing process begins which involves an escrow agent. The escrow agent is present during this process in order to make sure that the borrower follows the loan requirements and that the trust deed is recorded. Once that has been done, the loan is closed.

There is, of course, a lot more that goes into being approved for a hard money loan than what is outlined above but this, however, should serve as a jumping off point for potential house-flippers who are interested in hard money loans. Hard money loans may not be for everyone but it is definitely an option that real estate investors, especially house-flippers and developers, should consider.

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Yanni Raz

Yanni Raz is CEO of HML Investments and has been a hard money lender for more than 10 years. Raz was a real estate broker for five years before he partnered with a group of investors from California and began assisting real estate investors in financing commercial and residential projects. He writes about real estate financing for magazines, blogs and other online news outlets.


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