How Hard Money Loans Work

Looking for more information on how hard money loans work?  The infographic below walks you through the process in a quick and easy-to-understand format.  It skips all of the confusing jargon and helps you to understand the process in plain English while helping you prepare for a fast and easy closing, meaning you can focus on your project.

The Process of Getting a Hard Money Loan

Bank loans can take forever and you’re lucky if you ever get a real person on the phone.  Relying on a private investor can lead to headaches and prevent you from reaching your goals the way you feel they should happen.  That’s why using a hard money lender is so appealing.  Your loan specialist is there as a partner to get you the money fast so you can do what you do best and then help fund your next project too.  But hard money loans can seem confusing for a first-time user, so we’ve put together this quick and easy 9-step guide to walk you through the process.

Step 1 – Find Your Lender and Get Your Documents Together

The first thing you’ll want to do is to find a hard money lender that you can trust.  It’s important that you feel confident as they are the ones who will be helping with and supporting your project.  Once you have the right partner, you can help to speed up the loan process by making sure you have the following list of items ready to go:

• Address
• Purchase price
• Estimated construction costs
• After Repair Value (ARV)
• Scope of Work
• Exit Strategy

Step 2 – Evaluation and Underwriting

To help get the process moving, there are certain things that the lender will need in advance.  Without these, you can slow down the process.  Because it is not a bank, they need to mitigate risk by looking at your investment history & comparable properties.

That’s why you need to have the following ready before meeting with your specialist:

1. 1. • Analysis of the property features
      • Your estimated construction costs
      • Addresses of comparables to confirm the ARV
      • Potential profit margins of the deal
      • Your experience level
      • Access to your credit history

Step 3 – Approval!

If everything checks out above, then upon evaluation hard money loans can close in under 48 hours. If your loan is approved, you get a proof of funds and a lender letter and you’re one step closer to acquiring your new project.

Step 4 – Inspection

Before you can proceed, a lender-hired inspector needs to walk the property for extra assurance.  The goal here is to make sure the lender feels confident in the property and the outline of the project.  It is important for everything from new construction to flips.

Step 5 – Title Time

If the inspection checks out, you and a title company can close on the property.  The title step is the trickiest part.  If the title clears you can move on to step 6 which is your project.  Sometimes the title gets caught up in a battle like someone else’s signoff being needed to sell.  In this case, you and your team will work to get all needed clearances and then move to step 6.

Step 6 – Rehab

This is where the lender finances the construction via a “draw schedule” where money is released at milestones during the rehab process.  The lender’s inspector monitors quality and progression and approves the draws as needed.

Step 7 – Interest Payments

Now that your project is underway and the loan has started, you’ll begin to make interest payments while construction is happening.

Step 8 – Flip It!

Once the project is complete, you can list it, sell it and move to your next project.

Step 9 – It’s Payback Time

Once sold, or upon project completion, it’s time to pay the remaining balance to the lender.  You can also use this time to go over your next projects or see if the lender has any that you may find interesting.  One of the big benefits of working with hard money lenders is that they get exclusive access to unique properties that are not normally listed on the MLS.  Once you find one, then it’s back to step 1.