Hard Money Loans Process Overview

22 Replies

Hi,  I'm flipping homes now and was just wondering if anyone who has any experience with hard money loans could give me a brief overview of the process as far as whether or not you need to get pre-qualified with a hard money lender before you find your flip.  Does it take a long time to get pre-qualified if you need to before you can get pre-qualified?

I'm shopping for some hard money lenders right now and I know that some don't even do a credit check.  Are you supposed to have a detailed sheet of comps/repair costs to show the lender before you apply for the hard money loan?  I just wondering about the funding process for hard money loans as well.  Any info would be appreciated.  Thanks,  Jeff

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Jeff, since HMLs are collateral lenders, you need the property under contract or own it for them to review an application. 

Now, I made cash loans of all kinds, but I was leaning on the credit side but could then look to collateral when credit was not available or poor. I doubt few HMLs really do that  but may.

A resume of your experience, past transactions, will be helpful, but without a property in hand they won't have anything to consider. 

You should have detailed costs of any rehab outlined as well. Don't forget closing costs and holding expenses, I suggest you be conservative. 

They should want to see the skin in the game, your source of funds for your side of any purchase. If partners are involved, what the deal is needs to be detailed as well.

Pre-purchase, you can show the property, the offer to be made and the above and perhaps obtain a commitment to fund. 

As to details, I would imagine each will have their own requirements, some won't look at tax returns, some may consider them, but really there isn't any real credit or asset analysis is in conventional loans, they just rely on the property and some are ready to snag it from you if you fail. 

HMLs are about the last resort, the title lenders of RE, high interest, high points, short term collateral based commercial lending, certainly some are better than others, but I'd exhaust banks, credit unions, brokers with private money before looking at an established HML dealing on a national scale or even regionally. By broker with private money I'm saying a mortgage broker who may do some loans with investors they have, not dealing directly with the investor.

You'll see ads about private money being available, ignore the term private money lender as they are HMLs.  A private lender is someone you know who you have had some relationship with. If anyone advertises to make a loan, they are not private lenders, they are in the business of lending. Good luck  

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Ken and Bill,  Thanks for the good advice.  I appreciate it.

Seems when some things are said, and not in detail, the idea conveyed may be different requiring more explanation, such as a cash contract and obtaining a loan.

While there may be state or even local matters that view a cash offer as Ken mentioned, that isn't necessarily the case everywhere. Your mommy might have the money to loan her dearly beloved son to buy a house on a cash contract. A cash offer has no financing contingency, you must show up with funding. But, you can certainly obtain a loan without the financing contingencies if you can obtain one in time to close. The seller can not dictate a buyer's source of funds. 

I don't see an issue with an HML, but a conventional lender would rather see the financing contingencies in the contract because not having them puts the lender under the gun to get the loan closed in time, they can't "control" settlement, say extending the contract 3 days to obtain a lender's policy for example and they could easily do all the work and never close the loan.

Point being, don't think that a cash contract prevents you from obtaining other financing, that is between you the borrower, the lender and the settlement agent in conventional settlements. I understand that some sellers, like REO, may stipulate cash being available, but they can not keep you from borrowing as a seller. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

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Marcus,  great article,   I just read it.  I guess the confusing part for me is that a hard money lender from Phoenix told me she could fund the deal for a flip in as little as a few days assuming that the numbers worked for her and that essentially I could treat is as a cash deal even though it's being financed.  One more note of interest is that one of the speakers at the  house flipping conference who has supposedly flipped thousands of homes said that he uses hard money all the time along with any other methods available in order to finance his flips(even though he has plenty of his own cash!)   Some people on this forum think that hard money should used as a last resort although apparently this house flipping guru didn't think that was the case.  What is your view on this?   

This is in response to the above comments, which were very good.

At our shop, we look at credit.  You either have cash, good credit, and/or experience, and we want to know about all of them.  These are the factors that are weighed when a company thinks about lending you money.

That being said, I can assure you that your HML does not want to take your property back from you. It is a real hassle to foreclose on anybody. I have heard people talk about it, but we really don't want to do it. We are careful about who we lend to, because our business is to lend money, not fix houses. (I, of course, like to fix houses too, but on my own time :) ).

Before I worked at a HML, I used them to do flips. I am a fairly cautious person, so I really wanted to get pre-approved before I went out and made offers. I know most HML's say, "bring us the deal, then we can make a decision", and I get that. But, I want to be able to feel secure that when I make an offer, I really can close it. So, at the very least, I like to have a conversation with the loan officer about what they are looking for.

One other quick thing.  We have had Fannie get really upset when people make cash offers, and then come in with our financing.  It has spiked some deals in Chicago at least.

No company avatar mediumDerek Walvoord MBA, Paxton Properties

I'd gladly pay $10 for a gallon of water in the desert, but not at a restaurant or grocery store! HMLs have their place, I've just never had to go there, I used conventional money starting out, used partners, private money and my own. 

If that guru has a better use for his money, like lending it out, he might just use what he calls hard money, ever think why he pays $10.00 for water when he can just carry his own? May be he doesn't really have water, might be he doesn't really trust the place he takes it to, can't really think of a good reason to pay more for something than you really need to.

If you're stuck in the desert, then $10 might save your life. Just don't stay out in the desert! :) 

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Originally posted by @Bill Gulley :

I'd gladly pay $10 for a gallon of water in the desert, but not at a restaurant or grocery store! HMLs have their place, I've just never had to go there, I used conventional money starting out, used partners, private money and my own. 

If that guru has a better use for his money, like lending it out, he might just use what he calls hard money, ever think why he pays $10.00 for water when he can just carry his own? May be he doesn't really have water, might be he doesn't really trust the place he takes it to, can't really think of a good reason to pay more for something than you really need to.

If you're stuck in the desert, then $10 might save your life. Just don't stay out in the desert! :) 

I definitely understand what you're saying Bill, but from a financial planning stand point a HML can have quite a few advantages:

Limits Risk- deals go bad all the time "guru" or not so why lose 100% of the funds you put into a house when you could just lose 20% and the payments you made to date.

Opportunity Cost- I manage accounts that average returns in the high teens or low twentites. These are things that you see achieved through leveraged funds, hedge funds, options trading ect. So why would someone with "guru money" throw that away to save 4 points and 12%.

There is also the thought of just leveraging  your money to do double digit flips at a time. Thus exponentially increasing your cash on cash return.

So its all about your available options and your opportunity cost. So if you are looking at one deal at a time and you have available cash that you have stashed under a mattress then by all means. Every product has its place. Whether its conventional lending, hml, cash ect. its all about how we leverage it to our advantage as investors 

Richard Jeffries, Next Generation Management and Consulting LLC | [email protected]

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Hi @Jeffrey Hayes ,

I have posted a few articles helping members in vetting HMLs as well, feel free to refer to them. Here are my basic points of importance:

  • Interest/Points: easiest part to compare, pretty straight forward, start here by comparing all their rates and ask what their main determining factors are for selecting what the rates would be, usually those factors are term and LTV
  • PrePayment Penalty: there should never be any prepayment penalty with HML, most do not charge one but always be sure to ask if there is a minimum amount of paid interest
  • Junk Fees: often times these are not spoken about until they appear on the HUD. They are completely unnecessary. In California where I do most of my lending, this generally amounts to about $3k per deal. They are names processing fees, rehab draw fees, inspection fees, etc. All can be eliminated
  • DIRECT Lenders: I always strongly suggest to work with direct lenders because it minimizes the risk of the financing falling through due to back-end investors spending their money elsewhere. Ask your prospective lender how long it takes them to close and if they are the actual check writer. They should be able to close within 3 - 5 days.
  • Long Term Relationship: lenders are your financial partner, both the HML and borrower should view it this way. Lenders should want to help build your business and remain your financing source. Ask if the rates can be negotiated after you have proven yourself a little
  • Asset Based: most all HML as asset based, with no minimum credit score. All the security is in the project itself.

Hope this helps, best of luck with your search and feel free to contact me at anytime.

Best,

Ben Stoodley

    Originally posted by @Richard Jeffries :
    Originally posted by @Bill Gulley:

    I'd gladly pay $10 for a gallon of water in the desert, but not at a restaurant or grocery store! HMLs have their place, I've just never had to go there, I used conventional money starting out, used partners, private money and my own. 

    If that guru has a better use for his money, like lending it out, he might just use what he calls hard money, ever think why he pays $10.00 for water when he can just carry his own? May be he doesn't really have water, might be he doesn't really trust the place he takes it to, can't really think of a good reason to pay more for something than you really need to.

    If you're stuck in the desert, then $10 might save your life. Just don't stay out in the desert! :) 

    I definitely understand what you're saying Bill, but from a financial planning stand point a HML can have quite a few advantages:

    Limits Risk- deals go bad all the time "guru" or not so why lose 100% of the funds you put into a house when you could just lose 20% and the payments you made to date.

    Opportunity Cost- I manage accounts that average returns in the high teens or low twentites. These are things that you see achieved through leveraged funds, hedge funds, options trading ect. So why would someone with "guru money" throw that away to save 4 points and 12%.

    There is also the thought of just leveraging  your money to do double digit flips at a time. Thus exponentially increasing your cash on cash return.

    So its all about your available options and your opportunity cost. So if you are looking at one deal at a time and you have available cash that you have stashed under a mattress then by all means. Every product has its place. Whether its conventional lending, hml, cash ect. its all about how we leverage it to our advantage as investors 

    I'd say from a planning stand point, there can be advantages, from a financial point of view I'd disagree if it's simply based on your suggestion of limited risk and accepting a lower return is may not be the wisest move financially. I've never seen a real estate deal lose 100%, since the dirt is still there, not sure how one might accomplish that. And, you don't just lose 20% with deficiency judgments and labor suits, you can certainly go in the hole for more than you put in for a loan. 

    Don't want to get off topic, but drilling down further in the chapter of opportunity costs (OC) is the marginal propensity of consumption (MPC), which is what my example was with $10.00 water.  OC is the cost of the alternative investment not taken, paying more in fees and interest increases that cost. The MPC tells us that the value to a consumer (borrower) decreases as consumption (ability to obtain funding) goes up. If a borrower can't get funding he will pay the higher price, as his ability improves (experience, credit, management, ability to pay, etc.) he will move to less expensive funding opportunities. 

    At least that's how I taught economics in college.

    Your cash on cash can exceed your total investment return, no real money in and the COC is sky high, but, did you really make money or all that you could have? That will have a different answer. Paying higher costs to obtain the same out come is not financially sound, but then you look at use of cash and find the balance between cash used and leveraged to yield the highest return at different risk assumptions. What is the OC of cash used?

    If financial products didn't fill a niche or need, they wouldn't be a "financial product". Sub-prime lending is the area we are in here. 

    More to topic, very good points made above as to vetting a lender. New borrowers have a begging mentality when applying for loans, to me, it was a scary way of looking at some deal. If they are begging for money, to me that means I better look closely at the deal. This goes more to RE operators than a young couple buying their first home, I discount the nervous and uncertainty of such borrowers, simply inexperienced. 

    But when a business person asks for money, they need to show more confidence in obtaining funding, they need to be assured that the deal is viable. Those borrowers are not begging for money, they give a lender the opportunity to partner financially to make money.

    I didn't mean to imply all HMLs or lenders want to foreclose very few individual types may have such ideas, but as lenders, we don't want the property, we want the money!

    There are times when the speed of deal is critical, a good broker or HML can fund pretty quick and the benefits will out weigh the higher costs. The quickest I ever did a secondary loan was within 72 hours, got title and appraisal ordered explaining the rush, that really can't be done today, got title and the appraisal back the next day and closed the following morning, funded at the table and sold the loan the next day. Letting that be known caused a lot of problems with Realtors, BTW, they expected all deals to fly through in a week.....

    Usury laws don't generally apply to HMLs as they don't do consumer financing, only commercial. They can be exposed to predatory lending issues in a commercial transaction, larger lenders have less issues as they make more loans and can justify their product easier than an individual type HML. Size and scope matter.

    I've had many borrowers who thought they had a credit issue or would not qualify on the conventional lending side, many were surprised. Those starting off in RE should not assume they can't qualify if they are anywhere near close, so check out the cheaper money first, you'll probably get by with less of a down payment conventionally, then if you know there are issues, an HML can often save your day. Keep in mind too, HML money is short term financing. :)

    Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

    Can anyone answer this question regarding timeline of hard money loans?  I don't quite understand the timeline of hard money loans?  

    I find a house.

    I get an accepted offer

    I contact the hard money lender

    I guess what I'm asking for is  a timeline using hard money from time of accepted offer to closing?  How does it all fit together?  Specifically in Arizona if anyone is familiar with Arizona Real Estate Laws.

    My other question is I'm still confused as far as whether or not I call it a CASH OFFER on the purchase contract since hard money lenders say that they can get you the money within 24 hours sometimes?  At what point does the money come in from the hard money lender i.e  does the hard money lender send that money right to the title company right away?  Who holds the money?

    Don't make a cash offer, say you are obtaining a loan so that you have a financing contingency. Take the accepted offer to a lender, they will begin the process.

    Some HMLs can act quickly, 3 days, that's not this issue as much as getting title work and schedule a closing, that depends on who can do it. Call a title company and ask them, a HML probably won't hold them up, the title company may be the slow one.

    Financed contracts usually set an estimated settlement date 30 days after acceptance. :) 

    Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

    @Bill Gulley to sort of piggy back @Jeffrey Hayes 's question, would it be a good practice (once we've figured out our best HML for our needs) in the offer we submit in our "Finance" clause to put a contingency of maybe 3 or 5 days for a loan commitment as opposed to the default 30 days? (I usually have closing date 45 days from effective date for conventional loans) Most listed houses state "Pre-approval or Proof of funds must be submitted with offer" and since we won't be getting a PRE-approval like conventional funding would that be the best way to be taken seriously? If we can't actually follow through with a Hard Money Loan like we thought we would be able to it seems that our offer may be still attractive enough since the seller would only be "at risk" for only a few days. Hope that makes sense....

    @Fausto 

    @Fausto Carosella undefined

    Very good play to run on! Conventional usually runs 30 days but can be drawn out by lender requirements or other matters. Asking for 5 or even 10 days shows confidence in obtaining financing, shortens the wait and will hold the property off the market for less time, all something sellers (and their agents) want to see! I suggest you shorten that in the offer by saying "HML Financing" sounds like a finance company to most and they shouls smile at the short commitment. Good thinking! :)

    Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

    Thanks Bill and Fausto,  that is a great strategy that I will use!

    Bill Gulley,  do you or anyone else on this forum know how to get the pre-qualification letter  when using hard money as some listing agents require this when submitting an offer?  If you don't take the accepted offer to the hard money lender until it's under contract how do you go about getting the prequal form?  Thanks

    Jeffrey, most hard money lenders will give you a POF if you ask them for one.

    Hello, 

    That was a lot of good information but I wonder if anyone could tell me should I contact HML before I find deals to give them a heads up and already have all my business information on file with them so when I do bring them a property they already know who I am?

    I had found one home and figured out the numbers and thought it would be a great deal so i put in an offer and then contacted three hard money lenders, one was only interested in higher amount loans and the other two I got the same response, they wanted my personal credit report and my personal job information, along with all the information I gave them  in my property portfolio. By the time they had all the information they needed the bank had already told me they needed to move forward with another buyer unless i could give them a solid closing date.

    Is there specific types of hard money lenders i should reach out to for Asset based hard money lenders? How do i find a HML that will work off the asset only and not my personal information?