Many of those unfamiliar with hard money loans wonder why borrowers seek private money loans to fund their real estate projects. The most common misconception is that these borrowers lack the creditworthiness to get a loan from a conventional source. And while this may be true in some instances, there are many reasons why borrowers ultimately go with a hard money deal to fund their project. Some hard money loan advantages include:
- Fast Funding. Traditional banks face strict regulatory and due diligence requirements. These regulatory frameworks can result in a conventional loan taking several months to close. A hard money lender can often fund a loan in under a week.
- Less Hassle. Conventional lenders require a significant amount of documentation for loan structuring and the closing process. This includes sensitive personal information and documents that can be difficult to obtain on short notice. In a hard money deal, the lender focuses more on factors that are relevant to the condition and value of the collateral.
- Greater Flexibility. Again, traditional banks are subject to strict regulations and guidelines. They are typically unable to step outside of their normal lending guidelines to get a deal done. But loan structuring in a hard money deal is much more flexible. Hard money lenders can make exceptions and even implement creative financing options like cross-collateralization to get a deal done.
- Unusual Circumstances. This point is closely related to the previous one but relates more to the circumstances surrounding the subject property that makes it difficult to obtain conventional financing. For example, the property may be involved in a bankruptcy, probate, or family court matter. A hard money lender is more likely to understand these circumstances and work around them to get a deal done.
How Fast Can Hard Money Close?
Real estate markets have grown increasingly complex and competitive. In this environment, potential buyers often need to close quickly or risk losing a property to a more qualified purchaser. For this reason, one of the most common questions that borrowers have is “How fast can hard money close?”.
The answer to this question depends on several factors. For example, the type of hard money loan needed, the collateral, the borrower’s circumstances, and whether an appraisal has already been completed. If there is an existing appraisal for the property that can be assigned to the hard money lender, then a loan can be funded in as little as 2 to 3 days. If there is no appraisal and the hard money lender must order one, then funding can take 5 days or more. For owner-occupied properties, the closing process can take 10 days or more since there are typically more regulations to comply with. However, it should be noted that most hard money lenders do not typically fund loans for owner-occupied properties.
If you are considering a hard money loan, it is a good idea to involve your lender in the process as early as possible. Let the lender know that you are searching for properties and provide any documentation that the lender needs at the outset. This can speed up the closing process and the more information the lender has, the more accurate the estimated time to fund your hard money loan will be.
The Hard Money Loan Closing Process
While every hard money lender has its own procedures, the closing process typically includes the following steps.
#1 – Pre-Qualification
Pre-qualification is usually the first step after the borrower finds a property. The hard money lender will gather basic information about the borrower and details about the property. The lender will spend the most time looking at the property, considering factors like the property’s current fair market value, its value after repairs are made, and the loan-to-value of the requested loan amount.
#2 – Loan Application
The loan application is the formal beginning of the closing process. The borrower usually completes the application the same day or within a few days of receiving the pre-qualification. This includes gathering the borrower’s personal information to run a credit check and verify income.
#3 – Hard Money Loan Processing
The borrower’s completed application will be turned over to a loan processor. The processor will review the application to ensure that all information is complete and accurate. If any information is missing, the processor will reach out to the borrower. He or she will order an appraisal on the subject property. Once the processor determines that the application is complete, it will be turned over to underwriting.
#4 – Underwriting
An underwriter’s main responsibility is to assess the risk of the hard money loan. They will consider all aspects of the application, from the borrower’s finances to the collateral. In terms of the borrower’s finances, underwriting is mostly looking to ensure that the borrower can pay the loan and identify any significant issues with the borrower’s credit history.
When evaluating the value of the property, the underwriter will look at the appraisal. An appraisal is a report prepared by a third party that offers an opinion as to the fair market value of the property. The hard money lender wants to ensure that if the borrower defaults, there is enough equity to cover the loan amount and expenses to foreclose on the property.
#5 – Approval
If the hard money loan passes underwriting, the lender will give the borrower a formal commitment letter. The letter outlines all the terms and conditions of the loan. Conditions are items that must be satisfied for the loan to close. For instance, the lender will likely want proof of hazard insurance and property tax information before closing on the loan.
#6 – Closing
The closing process involves the borrower, seller, lender, and closing agent. The borrower’s biggest responsibilities are to review and sign the loan documents and bring any funds required to close. The lender will send all loan documents to the closing agent.
The closing agent will follow the closing instructions and ensure that all requirements are satisfied. The closing agent will ensure that the original deed and deed of trust are filed in the public land records. The original loan documents are sent to the hard money lender.
There are many reasons why a borrower may choose a hard money loan to fund a real estate deal. These include the ability to close quickly, deal with fewer hassles, and greater flexibility to make a deal work. Prospective borrowers often ask the question, “How fast can hard money close?”.
While the answer to this question depends on many factors, the closing process can occur in as little as a few days. Every hard money lender has its own procedures and guidelines. However, the closing process generally consists of the 6 steps discussed above.
West Forest Capital: A Premier Hard Money Lender
West Forest Capital is a premier hard money lender that provides funds to real estate investors and others to finance non-owner occupied properties located in New Jersey, New York, Connecticut, Massachusetts, and Florida. We ensure that hard money loans are funded as fast as possible, often in as little as 3 to 5 days.
To learn more about our loan programs or to discuss a potential deal, contact a member of our experienced and dedicated team today.