Hard money lending differs from the conventional real estate lending guidelines that are followed by majority of the banks and real estate mortgage lenders. The needed verifications and proofs related to the documentation of a borrower’s assets, income and taxes can be very flexible through hard money lending sources. Commercial properties, residential homes, mixed-use properties in all shapes, sizes and conditions can be used as a collateral for financing with a hard money loan.
Many private money investors are actively involved in collateral-based hard money lending. Most of these investors pool their funds which are lent out on short-term basis at very attractive interest rates to real estate investors, with the underlying property acting as collateral. Most of the investors involved in hard money lending clearly understand all the facets related to property acquisition, rehabilitation, renovation and selling. Due to their prior and ongoing real estate investing experience, these private money lenders are able to process any loan requests they receive in a short duration, usually in less than two business days. This quick turnaround on their loan applications allow real estate property investors to secure the necessary loan funds quickly without sacrificing a lot of time.
When choosing among companies or investors engaged in hard money lending, always make sure you inquire about their own real estate investment experience. This helps to clarify if the investors can understand any specifics of your deal that may be otherwise considered to be unconventional by other lenders. The involvement of the hard money investor can be crucial especially for newer property investors. Those who are actively involved in hard money lending seek to protect their valuable investment by keeping close tabs on all aspects of the work undertaken by the borrower. This should be treated positively as it anyways aids in completing the project work on time and within allocated budget. Even routine procedures and steps concerning appraisals, work write-ups, property inspections, cash-flow analysis and estimates must not be overlooked by the investor. It is as much in the interest of the borrower as the lender to make sure the deal is good. The property buyer must follow the same diligent and prudent process related to any aspect even after completing the closing and settlement.
Collateral Requirements for Hard Money Lending
Generally the most important factor affecting the approval or a disapproval of hard money lending decision is the collateral and the equity. Private money lenders generally make loans only if the Loan-to-Value (LTV) offers them sufficient cushion to comfortably lend on a property. A lender who makes a loan on a property at only 50% of LTV is safer than the lender who makes a 75% LTV loan. A lender might opt for other ways to manage his lending risk, but the collateral which offers sufficient equity is the primary one. In cases where the lender deems the collateral (commercial or residential property) as insufficient, they may demand additional collateral to sufficiently cushion themselves in case of a loan payment default.
Additional assets offered as collateral entails the lender to place liens against all such properties. Other investment properties, primary residence, cars, boat or any other valuable asset may be used to satisfy any hard money lending collateral requirements. Unless in extreme and urgent cases, it is better to avoid putting additional collateral. This basically signals that the hard money lending entity expects you to fail in executing in the plan and thus fail to make their repayment. The lender in any situation shouldn’t have more to gain by a borrower’s failure than sticking to the plan and loan terms. Tying up other properties can restrict the investor’s future flexibility in handling his finances in a suitable manner.
Hard Money Lending Guidelines & Requirements
It is very important to properly understand all the hard money lending guidelines and requirements for your real estate deal. A close scrutiny of the major lending aspects such as discount points, interest rates, length of the loan duration, fees, escrow terms, draws, inspections, pre-payment, penalties and origination points is always advisable before actually reaching the closing date for the settlement of the hard money real estate loan. The borrower documentation related to income, assets and employment are not the most important criteria for qualifying for lending through a private money investor. Credit history of the borrower is given credence, but it usually doesn’t make or break the deal. It is best to make a checklist of these essential and important things to properly seek, confirm and verify during the entire lending process. A rehab or renovation project might need multiple inspections and draw requests that need to be decided and co-ordinated right on the closing table. Understanding the process followed by the private lender along with all their lending guidelines can make the entire loan process a smooth one with fulfill expectations.
Real estate investment as a business allows one to choose the people, companies and institutions he works or partners with. It is also essential to partner with hard money lenders who practice asset-based lending for closing on difficult to finance or unconventional loans. By working with those lenders who charge reasonable fees, have flexible terms and understand real estate investing and all it’s complexities, a investor can successfully close more deals in timely manner and profit. Private money investors can make considerable returns on their capital by engaging in real estate (collateral) based hard money lending.