Borrowers that understand what hard money lenders do and the exact roles they play have an advantage over others. This knowledge puts them in a position for an easier loan application process and increases the possibility of quick loan approval.
To achieve loan success with minimum stress, it’s advisable you work with a loan professional that specializes in this area once you’ve decided to opt for a private money loan for your next project.
Hard Money Loans
There are generally many misconceptions about hard money loans and how they operate.
People also refer to hard money loan operators by many names like loan officers and brokers, agents, mortgage bankers, etc. In addition, they have come to believe that hard money loans are even harder to get than bank loans. But that is not the case.
The Roles And Responsibilities Of Hard Money Lenders.
If you were to approach a traditional lending institution for a loan, you will be assigned a loan officer to handle the front end of the transaction. He/she will receive the application, inform you about different loan programs and their relevant qualifying criteria. Other duties include collating your income and asset information. Once this is done, your loan file moves to other staff for processing, underwriting and eventually closing. Of course, funds for the loan, if approved, is provided by the institution or bank the loan officer works for.
In the case of hard money lenders, this front end is just a drop in the bucket compared to the other tasks they will perform during the entire process.
These hard money lenders have to skillfully juggle a number of demanding tasks from start to finish and will often use their own money to fund the loans. Though one may argue that their work is easy since they can quickly resell your loan to a private investor in the case of default, note that they have to use all their skills to preserve their relationship with funding sources and keep those channels open. Without that, there will be no loans for you to apply for in the first place.
Next, we’ll look at the processes involved in getting a hard money loan so you can understand what the hard money lender actually does to get loans closed.
Creating Your Loan File Or Package.
This is undoubtedly the critical first step for the whole loan process.
The private money lender will need financial details such as your income, tax returns for some years, bank and investment statements, credit report and other assets and liabilities you have. Thereafter, the officer will guide you to complete the loan application which is often referred to as the “1003.” You’ll also be required to fill out a Statement of Information. The Statement of information or SI allows the selected title company to investigate the title of the asset for any encumbrances like liens and judgments.
An experienced hard money lender will make the process easy for you because they will know exactly what kind of documentation/information is required for a quick approval. The documentation is largely dependent on your financial situation and the kind of loan you are applying for.
Reviewing And Coordinating Title Information.
Title insurance is required by law to protect the owner (you), and the lender from any loss or damage due to an existing lien, encumbrance or any defects in the property title. Every investor will ask for this. You can make the whole process faster for yourself by filling out the SI properly and in a timely manner.
How it works: the title company will offer you a preliminary title report aimed at insuring the transaction. The report will contain a summary of the existing encumbrances of any kind on your real asset. The title company will then make you an offer based on the information contained in the report.
Once you have done your part, the title company and the hard money lender will have what they need to proceed quickly and at this point, your loan officer can let you know if there will be a problem with getting your loan approved. If there is no problem, the loan will progress and you can expect it to be updated at intervals especially towards the closing of the loan.
Coordinating Title And Escrow.
Engaging escrow services is another vital step.
This is done at the same time with the title insurance report. The escrow company is responsible for payoffs needed on the collateral (the subject property), recording all deeds and documents at the county office, coordinating the loan closing and handling disbursement of the loan funds. The hard money lender will ensure the loan funds get from the investor to the escrow company.
Often, the same company can handle both title insurance and escrow services or it could be handled by an attorney or two separate companies. This will depend on the law in the state where the loan is domiciled.
Verifying Payoff And Reinstatements.
Payoff and reinstatements are two different terms that you’ll come across during the course of your loan application.
Payoff. In simple terms, this a document that shows exactly how much the borrower needs to pay to settle a loan/debt. Payoff documentation can be ready in a few days or in several weeks depending on the type of lien involved.
Reinstatement. Where there is an existing default, the lienholder will be asked to provide a reinstatement report. The lienholder, in this case, is usually a mortgage or trust deed. The statement will give details of the amount required to make the loan good again.
Traditionally, it is the responsibility of the escrow service provider to get these documents but experienced hard money lenders may take it upon themselves to get them on your behalf. They will do this to mitigate any last minute problems that often crop up due to inaccuracies in these important documents. Specifically, a very high payoff can make it impossible or impractical to proceed with the loan.
Choosing And Advising You On The Best Hard Money Loan For Your Needs.
The loan structure you could expect from hard money lenders is not as rigid and formal as what you’d get with traditional banks for instance. Your hard money loan will depend largely on the lender you pick, their area of expertise, and their source of investment funds etc. The loan terms are open to negotiation and your loan officer is usually inclined to make you happy by adjusting the loan conditions to suit your peculiar situation/needs. So, don’t be afraid to bargain or ask for what you want. Ultimately, if he/she can find a middle-ground between you and the lending company in terms of interest rates, loan terms and so on, everyone should go away happy at the end of the transaction.
Providing Federal And State Disclosures.
There are Federal and State laws already in place to protect borrowers from unscrupulous lenders. These laws differ according to the type of loan but are mostly concerned with information regarding the cost of credit and loan terms.
For example, you can’t expect the same kind of loan terms for a commercial property loan as you would for a residential property loan so in either case, the required disclosures will differ. Your loan officer will take you through this step too.
Ordering Real Estate Appraisals.
Apparently, inadequate loan collateral equals no deal. The value of your proposed collateral property will determine the success or otherwise of this venture as that is the security on which the loan relies. We could even term it the “backbone” of the loan. Investors know this too and they will usually want to visit the property themselves to estimate its value. Your loan officer will know what works best for each investor. In any case, he/she is responsible for arranging access to the property and getting the reports done.
There are many ways to determine the value of your collateral, the most commonly used ones are:
- A licensed appraiser can prepare a detailed appraisal report.
- Some investors will opt for a Broker Price Opinion also commonly known as a BPO. A BPO is not as detailed as an appraisal report and is cheaper to produce. It is prepared by a licensed real estate broker and is useful as a supplement to other valuation methods or to give the investor an idea of the expected sales price in the prevailing market conditions.
- Automated Valuation Model is another option for estimating value. This service is also called AVM and it calculates the value of properties using mathematical modeling. The major parameters used is the value of other comparable properties at that point in time. The result (value) can be ready in seconds.
Underwriting Loan Applications For Hard Money Loans.
Underwriting is a tricky aspect of the loan process as the private lender’s reputation and relationship with investors can be easily affected by a bad decision in this regard. Usually, the investor has already specified his loan approval criteria beforehand to the hard money lender. Some investors may even choose to review each loan file themselves before approval. In any case, the lender will make his decision to approve your file based on the predetermined criteria from the investor, the risks involved, and after careful scrutiny of every other aspect of the application. The success or failure of every approved loan can make or mar the lender’s professional future.
Getting The Funds For Your Loan.
There are many avenues for hard money lenders to get loan funds.
- They may fund it themselves, if they are so inclined, and keep the loan on their own account.
- They could match you with an investor selected from a pool of investors based on the specific conditions of your loan package. With this arrangement, the funds are kept with an escrow company as explained earlier.
- Alternatively, the lender can sell the loan to another investor or keep it in a mortgage pool they oversee.
Determining The Loan Servicer.
The loan servicer could be an individual or corporate entity and they are responsible for collecting your monthly payments. They will also provide loan statements at predetermined intervals and prepare year-end tax documents. If the loan agreement requires the loan servicer to manage your escrow account for other things like taxes and insurance, then they will perform those functions as well.
The lender may or may not act as the loan servicer though typically, they will choose to service the loan. If they choose not to take on this role, the lender will hand over the loan documents to the nominated loan servicer and let you know when the first payment is expected.
There are some benefits if the lender services the loan as it will allow them to update the investor faster at any time about the state of the loan. In addition, most lenders earn their living and cover their overhead and operational costs through loan servicing.
Creating Loan Documents And Managing The Final Loan Closing.
The final deeds, mortgages and all loan documents will be prepared by the lender, an independent attorney, or a designated document preparation company. This closing and signing of loan documents stage differs from one state to another.
If the hard money lender has a notary as an employee, this person can oversee this step. In some states, only an attorney, an escrow services or title company is permitted to coordinate the signing. There are also regulations regarding the location for signing and who supervises it depending on the of type loan transaction.
Whatever the case may be, the loan officer will guide you through the process to the final sign off and ensure you are clear and understand your responsibilities thereafter.