How Do Hard Money Lenders Work?

How Do Hard Money Lenders Work?

July 13, 2020

Produced by:
Elizabeth Welgemoed

Elizabeth is a Senior Content Marketing Manager with over 10 years of experience in the field. Having authored or edited 1,000+ online articles, she is a prolific content producer with a focus on the real estate vertical.

Real estate investors need access to cash fast. Not only do you need money to snag great deals, but you need money to fix the homes up too. Without access to fast cash, you could lose the market’s best deals. Hard money deals help solve that problem.

With approvals in under 10 minutes online and funding within one week, you can grab the properties with the highest potential and increase your real estate portfolio fast. 

So how do hard money lenders work? Check out the simple process.

Apply Online

Most hard money lenders offer online applications. You apply for your loan from the comfort of your own home, providing information about yourself and the property you are interested in. Alternative lenders care about the property and your intentions with it the most as that’s their collateral if they lend you money

Determine If You Are:

-Fixing and flipping

-Fixing and renting

-Refinancing to get your hands on some equity

-Building from the ground up

-The reason for the loan and whether you’ve had financing in the last 24 months plays an important role in your approval.

See The Terms

Hard money lenders provide your loan options immediately. They base your loan approval on the home’s value after repairs. You’ll answer any questions about your plans with the home so they get a valid picture of the future.

Hard money loans provide access to cash quickly, so expect slightly higher interest rates, but shorter terms. Expect a term of a couple of years or less. This isn’t a standard 30-year mortgage. If you fix and flip, you’ll pay the loan off much sooner than the term ends. If you’re keeping the home and renting it, you’ll refinance the property once you fix it up and have tenants.

Appraisals Are The Key Factor

The property’s appraisal is the most important factor in your hard money loan process. Lenders care about your credit, but not as much as the appraisal. A 600 credit score is all that most hard money lenders want – which traditional lenders consider ‘fair’ credit.

It’s the home they care about. If you don’t make your payments, they’ll take possession of the property, just like a regular mortgage lender does. They’d sell it off to get their money back. That’s why hard money loans put emphasis on the property itself. 

They’ll look at what they call the ‘after repair value.’ You’ll talk about the home itself and the repairs you’ll make. Hard money lenders and their appraisers know the value of specific changes and can predict the home’s after-repair value.

This is how they determine your loan amount. Depending on the reason for the loan, you may need some equity in it, but many lenders offer 100% construction financing if you’re building from the ground up. If you’re buying an existing home, you may include the cost to repair the home too – giving you the capital needed to get your real estate investment going.

The Simple Steps

In short, here are the simple steps you should take if you’re ready to start real estate investing using a hard money lender:

Look for a hard money lender. Many offer the application and even underwriting process online. You complete an application upload your documents online, talking with your loan officer over the phone, completing everything from home.

Get pre-approved and accept the offer. Look at the terms. Know the origination fee and interest rates. Choose the loan that you’re most comfortable with and move forward with the underwriting process.

Provide the necessary documents. Your hard money lender will tell you what they need. The faster you act, the faster they can fund your loan.

Get the appraisal. The lender cares the most about the appraisal, so make sure you get it done quickly. 

Close on the loan. Most hard money lenders close on the loan within a week. This means from start to finish, you’ll have the funds needed to buy your next real estate investment in 7 days or less.

Hard money lenders provide easy access to funds to buy real estate investments. Whether this is your first investment home or you’re looking to add to your already robust portfolio, a short-term loan from a hard money lender gives you access to quick capital, making you a fierce competitor in the real estate investment industry.