When you need money, and traditional lending options are out of reach, it’s time to look for other options. With at least 28.1% of Americans being real estate investors, hard money loans are great for quick funds and require less paperwork.
A hard money loan is primarily asset-based and usually issued by private lenders. Unlike in traditional lending, hard money is primarily based on asset value rather than a credit profile. However, you still need to provide some documents to qualify for hard money lending funds.
It helps to be ready before you approach a lender. Here are some of the vital documents that a lender may ask you to submit.
1. Personal Identification
A hard money lender requires you to provide some form of identification to minimize fraud. This is a standard requirement for both individual borrowers and businesses.
Most hard money lenders require individuals to produce at least two forms of identification. For a business, providing an operating agreement or a corporate document will suffice. However, you might also need a Certificate of Good Standing.
2. Promissory Note
The promissory note tends to be among the vital hard money loan documents involved in the lending process. When you append your signature on the document, you commit to submitting specified payments promptly.
The document stipulates the various rules to be followed by the designated trustee when ensuring the agreement is fully executed.
3. Preliminary Title Report
This document helps a lender establish whether the property is clouded with liens or other outstanding loans. When lending private money, your lender needs to be certain that a property will transfer with a clear title.
The loan is meant for the first loan and may not be applicable as a second mortgage. Most lenders will avoid dealing with borrowers who require a second mortgage due to insufficient equity. And in the event where a borrower defaults, the lender wants to recoup their money quickly.
4. Purchase and Sale Contract
Like most asset transactions, hard money investing involves a legal contract that captures all the terms and conditions of the transaction. This document contains the buyer’s rights and obligations and denotes the exact date when the buyer should have the funds.
You are required to provide a certified copy of the purchase contract. In addition, you should mention the title company along with any escrow instructions involved in the transaction.
But if you don’t have the signed purchase contract while waiting to establish financing, you can still provide the proposed contract. Showing your lender the contract you intend to use can make your property report appear legit and complete.
5. HUD Closing Statement
The federal regulations require this document, and it includes all the costs of acquiring the property, including any closing fees. The HUD statement eliminates any confusion and uncertainty around the exact costs of a home and stipulates how much you will pay at closing. Ideally, this is a standard requirement that applies to most property transactions in the US.
6. Personal Guarantee
While this document is optional, it is quite common in hard money loan requirements. Ideally, it’s a simple agreement between the lender and the borrower showing that the lender will take over the collateral in the event where a borrower doesn’t make the full payment.
There are different types of personal guarantees including, conditional, unlimited, and limited. Both parties should come to a consensus about the terms before the closing stage.
7. Deed of Trust
The deed of trust introduces a neutral third party to keep both parties in check and uphold all their responsibilities. The designated third party will then hold the property in question until all involved parties fulfill the stipulated obligations. Once you’ve cleared the loan, the trustee will transfer the property deed to you.
8. Proof of Insurance
The property must have sufficient insurance for vandalism and applicable catastrophic events. This is often a hard requirement for purchased or refinanced real estate. A hazard insurance disclosure denotes your rights and obligations concerning maintaining insurance cover for the property in question.
9. Additional Documents
Proof of Income
In most cases, a lender will require proof of income before issuing consumer hard money construction loans. These documents help the lender establish whether you are capable of making the required payments. Some of the widely accepted documents may include:
- Bank statements
- Tax returns
- Pay stubs
- W2s
The documents must be recent, and you may be requested to provide multiple documents to prove consistency.
Conclusion
Hard money credit options can give you the means to afford real estate investment. Developers, house flippers, and individuals often leverage the loans since they are an easy and quick way to get finances.
Unlike a conventional mortgage, hard money loan rates are higher, but their convenience is attractive. However, the lenders base your loan on the asset you are purchasing and not your overall personal credit profile.
