The Requirements for a Hard Money Loan: Documents Required to Qualify

Hard money loans are a great way to get the cash you need when traditional lending institutions won't work with you.

They can provide excellent financing opportunities for real estate investors who fix and flip, build properties in need of renovation or are looking to pull out cash from an existing property.

Hard money loans offer three significant benefits over conventional mortgages: speed, flexibility, and security.

If you’ve heard of hard money loans, but are unfamiliar with how they work, you might be wondering where to start.

Hard money loans require different requirements and documentation from traditional bank loans.

What Exactly is a Hard Money Loan?

Hard money loans, otherwise known as private money loans or bridge loans are a source of short-term financing used by real estate investors.

These loans are secured by a hard asset, usually real estate.

Hard money lenders are either private individuals or private firms, and each of them have their own specific guidelines by which they lend by.

Individuals and private companies are able to fund hard money loans in a matter of days, provide more flexible lending parameters and offer more accessible loans to a wider variety of borrowers than big banks.

Expect a hard money loan to have a term ranging from six months to two years, depending on the lending institution and the borrower’s circumstances.

How long they last is largely dependent on the borrower’s needs and the amount of risk the lender is willing to assume.  

Lending for a longer period of time is riskier for a lender since changes such as a decrease in property value or a negative change in a borrower’s financial position can occur during that time frame. 

How to know if you qualify for a hard money loan? 

We'll discuss that here, including documents, qualifications and what your credit score needs to be in order to be approved.

While there are numerous requirements needed to obtain a hard money loan, three essential conditions must be met.

1. Down Payment or Equity

Hard money loans require a larger down payment than what is necessary for traditional mortgages because the latter offers support from other assets, whereas hard money loans are based solely on the equity in the real estate being purchased.

To obtain a hard money loan the minimum down payment for residential properties is typically 25% to 30%. Commercial properties are usually at the higher range, 30% to 40%.

Lenders may also allow borrowers to use multiple properties as collateral for one loan. This is called "cross-collateralizing."

A borrower's chances of being approved for a hard money loan increase with the more equity and/or down payment they have.

2. Financial Capacity

Hard money lenders will require a borrower to possess the financial resources to make the monthly mortgage payments in addition to being able to cover the property’s carrying costs.

Carrying costs, otherwise known as holding costs, are expenses such as property taxes, insurance, homeowners association dues and utilities.  

Having sufficient cash reserves shows a borrower’s ability to make the aforementioned monthly payments and therefore increases the probability a hard money loan will be granted.

When applying for a hard money loan, an applicant without any cash reserves will generally have a difficult time obtaining funding.

Under the circumstance a borrower does not have any cash reserves, a hard money lender may withhold a portion of the funds to help cover the interest payments for a certain period of time, ranging anywhere from 4 to 12 months.

By withholding funds, the lender is ensuring payment for that set period of time hence reducing their risk.

3. Real Estate Investment Experience

If the borrower is planning to perform a fix and flip or any type of renovation to the property, the lender will usually ask for the borrower’s experience in the field.

Borrowers without any experience will generally have a tougher time getting funding than seasoned professionals. 

Veterans will also benefit from smaller down payment requirements and lower interest rates once they are a proven commodity and have a strong track record with the lender. 

Individuals lacking real estate experience must present potential lenders with a comprehensive description of their plans for renovating the property and the expected sales price.

The lender will be very interested in the borrower’s exit strategy from the hard money loan because this is how the lender is repaid.

The two most common exit strategies are for the borrower to either sell the property or for them to refinance into a conventional bank loan.

Documentation

Along with those three basic requirements, a borrower should also be prepared to provide various documents.

There are a variety of hard money loans and each independent lender requires differing levels of documentation depending on their preferences. 

However, there are a few standard documents nearly all lenders require. 

They are as follows:

Hard Money Loan Application

The borrower is responsible for initiating the hard money loan application process which should include basic information such as 

• type of hard money loan needed
• how the funds will be used 
• type of property being used as collateral
• property location
• loan amount
• loan-to-value ratio 
• borrower’s credit score

Unlike a traditional bank loan application which requires a borrower to check many boxes, a hard money loan is surprisingly easy to apply for.

During the approval process the lender will also ask for a borrower’s basic financial information as well as information about the property.

Appraisal

A majority of lenders will want an appraisal done, helping to verify the value of the property.

The appraiser will likely be selected by the hard money lender and paid for by the borrower, this is normal practice.  

Avoid wasting money on having your own appraisal, most lenders will not accept evaluation.

Purchase and Sale Agreement

Like most real estate transactions, hard money loans involve a legally binding purchase contract known as a purchase and sale agreement, detailing all the terms of the transaction.

It spells out the rights and obligations of the buyer and provides a date by which the buyer will obtain financing.

The Purchase and Sale agreement also provides that the buyer makes a deposit equal to a small percentage of the sale price.

The deposit is held in escrow until a certain date or until the transaction is completed.

Proof of Income Documents

Proof of income documents such as bank statements, federal tax returns and W-2s are perhaps the most important documentation since it shows the borrower’s ability to make the monthly interest payments.

Deed of Trust

A Deed of Trust is only utilized in certain states and is prepared by a third party trustee.

The Deed of Trust creates a lien on the real estate being used as collateral.

This document is registered at the county recorder's office where the property resides and provides public notification the subject property serves as the collateral for a loan.

Since the Deed of Trust does not obligate repayment, it is necessary for the borrower to execute a Promissory Note.

Promissory Note

A promissory note states how much money is owed, when to repay the debt plus the rate of interest for this loan.

Personal Guarantee

Giving a personal guarantee means that if the business is unable to repay the debt, then you are personally responsible for it.

This document is sometimes required by lenders, but not always.

Cost Estimate of Project

In some cases a hard money lender finances both the cost of the property and the cost of the renovation.

In this scenario, the contractor performing the renovation must present an estimate of the total cost of the project.

Title Report

Hard money lenders like traditional banks require title reports.

A mutually agreed upon title company, selected by the borrower and lender, will issue a preliminary title report indicating whether or not the property has a free and clear title.

The report will indicate any encumbrances on the property such as mechanics liens, tax liens or loans.

Identification

Identification must be provided by the borrower. 

In the event the borrower is a corporate entity, the lender is provided with articles of incorporation, licenses and operating permits. 

If the borrower is an individual, he must provide two forms of identification, usually drivers license and passport.

Mortgage Loan Disclosure Statement

Once a borrower has completed his loan application he is given a mortgage loan disclosure statement which spells out the terms of the loan including all fees and charges.

Fair Lending Notice

The borrower is also give a fair lending notice stating discrimination against a borrower due to race, religion, nationality, sexual orientation or marital status is illegal.

Why Select a Local Direct Hard Money Lender

Choosing the right hard money lender for your real estate project can be challenging. 

It is advisable to utilize your network, read online reviews and ask the proper questions during the due diligence process to ensure you are selecting the right private money lender.

Be sure your lender fits the following criteria to guarantee you get the best service and price:

• Select a direct hard money lender rather than a broker. Using a direct lender will get you the cheapest rate; going to a broker will cost nearly twice as much in fees. Direct lenders also process applications faster, making loan approvals easier and more straightforward.
• You know the importance of customer service. With lenders small enough to meet with you face-to-face, your experience will be more personalized and hands-on. When you deal with a larger national lender, you won’t get that opportunity.
• Local hard money lenders are more familiar with the local real estate market, and can make decisions faster to fund your deal.
• Smaller local direct hard money lenders can offer more flexibility than larger hard money lending companies who are tied to more bureaucratic policies. 
• A local hard money lender can structure your private money loan to suit your needs as a borrower, possibly offering customized payment schedules and being more understanding if problems arise with your project.
• Many nationwide hard money lending companies will bundle a pool of hard money loans together that they sell to private equity companies or other large financial institutions. These large financial institutions may treat you as just another loan number and not offer the customer support you need.

Most Common Uses for Hard Money Loans

Once deemed a financing option of last resort, hard money loans are more popular than ever.

Common hard money loan scenarios include;

• A real estate investor who needs to close quickly on a property with multiple offers, can stand out using a hard money loan - an offer accompanied by a hard money loan is often considered to be as good as an all cash offer.
• Fix-and-Flippers who only need funds for a short period of time.
• Real estate investors who do not qualify for traditional bank loans due to reasons such as;
• Bad credit
• Past foreclosure
• Previous short-sale
• Insufficient income history

Hard money lenders tend to overlook these issues and instead put more emphasis on the equity in the property. 

When institutional financing is unavailable and you need money in a hurry, consider a hard money loan to solve your issues.