Banks give you mortgage loans based on your credit rating. If your credit rating is too low, or you run into other difficulties, you can turn to other options that include a residential hard money loan. Bank and traditional lending institutions refuse to carry these type of loans because of the risk involved. The property is held as collateral. If the borrower defaults, the property is sold as repayment. Most hard money lenders don’t want the property, but since they’re willing to take the risk, they charge you higher interest and points. If this is an avenue that you want to explore, you’ll need the following items to ensure approval.
Detailed plan – Before you go in, draw up a detailed repayment plan of how you plan to repay the transaction and an approximation of how long it will take you to do so. Factor in potential interest rates and possible blocks to repayment. Also provide proof of your credibility – if you have a history as a real estate developer, all the better! – and demonstrate the purpose of your purchase. Secondly, outline how the funds will be used and any cash investment. While the plans may be obvious to you, they are unknown to the lender and he should be given a detailed proposition of how the funds will be allocated. Make the plan as clear as possible to your investors.
Many hard money lenders will fund 60-70% of the after-repair-value (ARV) of the home; you will be responsible for funding the additional 30-40% of the additional cost. If you have this cash on hand, that will increase your chances of being approved for the loan. Although, lenders are notorious for providing a small ratio-to value loan which means that most inevitably need to look for further backing elsewhere, most lenders will prefer that you have 30-40% of the additional cost in hand rather than using another loan to finance the difference.
Remember, that this is a business opportunity where you are hoping to persuade the lender to invest in you. Give him, or her, as much detail as needed.
Documentation – Most lenders focus on the value of the collateral rather than on your credit history, Nonetheless, pack along your documents such as W-2s, paystubs, bank statements and other items that demonstrate your credit history. Lenders may also ask for your financial history.
Financial analysis – The hard money lender will be holding your property as collateral, so you’ll need to demonstrate the value of your property to him. You may want to buy the house for personal purposes, or your purpose may be to buy the property in order to convert it and flip. Either way, explain your vision for the property and give the lender some idea why he should find you. Prove the value of the neighborhood and your particular property. Here are some questions that you may want to consider: What is the price of similar properties in this area? What is the history of the market in this neighborhood? What are its projections for growth? Websites such as zillow.com and trulia.com can help you find this kind of information.
Furthermore, draw up a financial analysis that details the budget on the project, financial projections, market trends, and equity. Show how the property you selected can guarantee profitable turnover. You’ll want to demonstrate the viability of your collateral so that the lender may be more willing to take the risk of lending you the money. If you default, at least he’ll have something of value to sell.
Presentation – You’re making a sales pitch. Look into your potential lender ahead of time. See what he’s willing to invest in. Look at the kind of loans that he’s given to others. Highlight these factors in your presentation. Match aspects of your presentation to his interests. Being able to meet his needs will hike your chances of getting the loan.
The short of it is..
You want to persuade the residential hard money lender to give you the loan. You’ll have to do more than simply ask him. You’ll need to interest him in your property; show him the value of your property. You’ll need to convince him that even if you default he still has something of value in his pockets that he can sell to make a profit. To do this, you’ll need to draw up a plan, a financial analysis, and you’ll need to create a convincing presentation.
One more thing…
Protect yourself legally – hard money lenders can set their own rates and have few regulations to curb them. You’ll want to make sure that you’re not being exploited. Have an attorney look over the condition before you sign the forms and make sure your lender discloses all fees and comes with a detailed repayment schedule. The Consumer Bureau stresses that you should seek a lender who is transparent and that he should be willing to answer all of your question regardless of how ‘stupid’ they may seem.
Take your time. It’s your money.