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If you’re looking to get a loan but don’t qualify for bank financing, it’s easy to get frustrated. The good news is that this doesn’t have to be the case if you own real estate. Hard money loans are available for anyone with real estate who is in need of quick financing.
Having said that, certain conditions are required to qualify for a hard money loan. Most of these requirements are unrelated to your income or credit history. They include proof of ownership, a purchase contract, among other documents. We have put together the different types of documents required by hard money lenders.
What is a hard money loan?
Before we look at the different types of documentation, let’s start with a few basics. Hard money loans are short term financing for real estate investors. These loans do not have strict requirements and take a few days to process. However, these loans come with higher interest rates. This makes them ideal for profitable business transactions such as rental property reversals. Having said that, investors use these loans to buy property or finance construction / renovation.
And like any other loan, private lenders need certain documents. The financial documents required vary depending on the type and use of hard money loans. Below is a detailed breakdown.
Types of hard money loans
Private lenders distinguish their clients according to the reasons for obtaining the loan. Here are the three classifications of hard money loans.
- Consumer loans – the loan proceeds are used for personal, family or household expenses. This loan requires a bit of paperwork.
- Non-consumer loans – require the least amount of paperwork of the three.
- Owner occupied consumer loans – require more paperwork than any other hard money loan.
The first step when applying for a hard money loan is to fill out an application form. As stated earlier, the documents to be completed vary depending on the type of loan you want. The paperwork process will also vary from lender to lender.
Common Documentation You Need To Get A Hard Money Loan
While the application process and required documents may change, some remain fairly constant. Here are a few.
- Purchase contract – you need it to finance a property with a hard money loan. A signed copy of the contract will make your report appear legitimate and complete. If you want to refinance a property, a detailed repayment statement is a requirement. This should also reflect the unpaid funds on the loan.
- Proof of insurance – Your property must be insured against catastrophic events or vandalism. This is often the case for a property purchased or refinanced.
- Preliminary title report – This shows that the property is yours and the title is not scrambled. It also means that the lender will have no problem trying to transfer the title. Darkened securities may have liens or other loans outstanding. The buy and sell contract should have an area where the seller and buyer agree on the title company. After the title report is ready, the seller, buyer, and lender should keep a copy.
- Loan agreement – you will need it when you use your property as collateral. The document details everything about the loan, including interest rates and repayment terms. It should also describe what will happen if you don’t make the payments.
- Identification – to minimize cases of fraud, lenders will require some form of identification. It is a necessity whether you are taking the loan as an individual or a business. For companies, a company document or an operating agreement is sufficient. The company must also have a certificate of good standing from the local secretary of state.
Not all of the documents listed above will apply to you. Some lenders may require documents such as a personal guarantee, while others may need proof of funds. Either way, you should be prepared to ask questions and seek further clarification.
In doing so, you will know all that is required of you. You will also avoid mistakes that could cost you dearly in the future. However, not all private loan contracts are the same. A rule of thumb is to request and review the hard money loan contract template. That said, you don’t need to rush through the rules and responsibilities set out in these documents.
If possible, take a day or two to understand each item of the loan. You can also use a hard money loan calculator to compare interest rates. For more in-depth research, go online and get a pdf document on hard money lending. The latter will detail all the processes you need to know before closing the deal. This means that you will go to your lender when you have all the information at hand. Not only will this make the process simple. It will also make you look educated and aware.
One final tip is to always approach your private lender as a serious real estate investor. This way, you can fund your transactions faster and with a higher loan-to-value ratio.