Hard Money Loan – Beginner Real Estate Investor’s Best Option
Hard money loan is basically still a mortgage secured by a real estate parcel, but it is easier to obtain than a conventional mortgage, because hard money loans are usually funded by private lenders, who are looking at different parameters in a borrower than a regular bank. For instance, hard money lenders are more lenient on credit and job history, if they believe the borrower/investor has a good business and financial sense for the real estate market.
When a new real estate investor wants to start buying properties with the intention of fixing them up and resell them, with no much money or experience, obtaining a hard money loan might be the best or only option.
Hard money lenders are widely available, and the parameters that they are looking for in a borrower vary widely based on their private investors requirements. Neverless, they are all looking for a borrower, who is prepared and has done his/her homework on the property, before assuming a financial liability.
The best way to show preparedness and diligence, as for any business endeavor, is preparing a business plan, a loan request package, which must contain certain important elements.
The information below outlines the components that should be part of any loan request package:
Presentation Letter – This section contains the FNMA 1003 loan application, a copy the credit report, a copy of a personal ID, like a driver’s license, and a brief resume. If there is no real estate experience to highlight, a list of books, seminars, courses or mentors should be included.
Sale Contract – A loan request package is usually submitted in conjunction with a specific property to be purchased, therefore a sale contract with all attached addenda need to be included.
Appraisal or BPO – Full certified appraisals are always preferred, but at least a Broker Price Opinion (BPO) prepared by a real estate agent.
Insurance Binder – Even if you have not obtained insurance on the property yet, at least a declaration page or a proposed insurance coverage, with all the limits, inclusions and exceptions need to be available for review.
Title Work – a lender has to necessarily view the full title history of the property, including any judgments or transfer of titles. A title letter report should be sufficient for start, although it is preferable a full title work and proposed policy.
Photos – Plenty of photos of the properties, inside and out, printed out on paper, not as digital attachment.
Repair estimate – If repairs need to be done on a property, a full detailed list of repairs generated by a licensed contractor will add credibility and validity to the proposal.
Profit Projection Statement – A spreadsheet highlighting the main number components: purchase price, closing costs, holding costs, repairs, realtor fees, expected funding fees and reselling price.
Timeline – Hard money loans are usually short term, but they can extend into several years (3 to 5.) Estimating length of the construction project and reselling time needed (or refinancing) are important in setting up the hard money loan and negotiating interest rates and fees.
A well prepared loan package proposal will make the difference in being able to obtain a hard money loan, especially as a new investor getting into real estate.