If you’re a real estate investor considering a hard money loan, you may be wondering what you need to secure the funding. Hard money loans can be an excellent alternative to traditional bank loans, offering faster approvals and more flexibility. This guide will walk you through the essential components you need to prepare before approaching a hard money lender.
What Do You Need for a Hard Money Loan?
This guide explains the following:
- A property to purchase or renovate
- Detailed investment plan
- Documentation and financial information
- Exit strategy
- Sufficient equity or down payment
Here’s a closer look at each.
A Property to Purchase or Renovate
The first thing you need for a hard money loan is a property you want to purchase or renovate. Hard money lenders are primarily concerned with the value of the property and its potential after the project is complete. Before approaching a lender, have a clear idea of the property you’re interested in, its current value, and the expected value after any necessary repairs or improvements.
Related: The ultimate guide to hard money lending for real estate investors
Detailed Investment Plan
Hard money lenders will want to see a detailed investment plan outlining your project. This plan should include information about the property, your renovation or construction timeline, estimated costs, and any relevant permits or approvals. A well-prepared plan will show the lender that you’ve done your homework and have a solid strategy for completing the project and repaying the loan.
Documentation and Financial Information
To apply for a hard money loan, you’ll need to provide the lender with various documentation and financial information. This may include:
- Personal identification, such as a driver’s license or passport
- Proof of income, such as tax returns or pay stubs
- Bank statements
- Credit report (although credit score is often less critical for hard money loans, lenders may still require a report)
- Property details, such as a purchase agreement or appraisal
Gathering these documents ahead of time will help streamline the application process.
Related: Why it’s so important to have a realistic budget for a fix-and-flip project
An essential component of a hard money loan application is your exit strategy – how you plan to repay the loan. Most hard money loans have shorter terms than traditional loans, so lenders will want to know your plan for repaying the loan at the end of the term. Common exit strategies include selling the property, refinancing with a traditional loan, or using rental income to pay off the loan. Be prepared to present a clear and realistic exit strategy to your lender.
Sufficient Equity or Down Payment
Finally, you’ll need sufficient equity in the property or a down payment to secure a hard money loan. Most hard money lenders require borrowers to have some “skin in the game,” meaning you’ll need to contribute a portion of the project’s cost. The specific amount required will vary by lender and project but be prepared to show that you have the necessary funds to invest in the project.
Related: Should you build a house to rent it out?
FAQ About Hard Money Loans
Check out these commonly asked questions about hard money loans. If you don’t see the answers here, please call our office and we’ll get you the information you need.
Q: How quickly can I get approved for a hard money loan?
A: Approval times for hard money loans can vary, but in some cases, we can provide approval within 24-48 hours, with funding available in just a couple of days.
Related: How to use a hard money loan to finance your next real estate flip
Q: Are hard money loans only for experienced investors?
A: While hard money loans are popular among experienced investors, they can also be an option for newer investors who may not qualify for traditional financing. Hard money lenders often focus on the property and project specifics rather than the borrower’s experience.
By understanding the necessary components for a hard money loan, you can better prepare yourself for a successful application and investment experience. Keep in mind that a well-researched plan, clear exit strategy, and sufficient equity or down payment are essential to securing the funding you need. With these elements in place, you’ll be well on your way to making your real estate investment project a reality.