Think a hard money loan is the right move? Here are the steps you’ll need to take to get financing:
1. Research hard money lenders
Traditional banks and credit unions don’t offer hard money loans, so you’ll have to look elsewhere for financing. Ask your real estate agent, local small business owners, and property investors in your professional network for recommendations, or do a simple search online.
Gather information on repayment terms, rates, and down payments so you can compare options and choose the right loan for you.
2. Submit a loan application
Each lender will have its own loan application process, but it’s generally much less involved than a typical mortgage application. Lenders may still run a credit check, but they will likely be much more lenient about your score.
The entire underwriting process might take anywhere from a few days to a couple of weeks.1
3. Identify collateral
As part of your application, you’ll need to identify your collateral for the loan. This one’s easy: It’s the property or asset you hope to finance with the loan!
The lender will likely require an appraisal to ensure the property is worth the amount they’re financing.
4. Make a down payment
Hard money lenders don’t have a set playbook for establishing down payments, so how much you have to put down will vary from lender to lender. Much like buying a house through a conventional mortgage, however, you’ll probably have to come up with some of the money on your own.
While it’s possible to get a conventional mortgage with as little as 3% down, most hard money lenders require down payments between 20% and 35%.2,3
Why the large down payment? Hard money lenders typically don’t want to lend you the full value of the asset being financed. By only lending you 65% to 80%, the lender stands to make a profit even if you default.
5. Sign the loan agreement
If you’re approved and can come up with the down payment, the lender will draft a loan agreement for you to sign. Hire an attorney to review the contract if you need help with the legal language in the agreement.
Don’t forget: Just like a traditional mortgage, a hard money loan will likely have closing costs. And, as the borrower, you’re the one paying for those.
Once you’ve signed, the lender will transfer you the funds.
6. Stay on track with repayment
Remember, the property or other asset you’ve financed with your hard money loan serves as collateral on the loan. If you stop paying the loan, the lender can seize the asset.
Review your payment schedule, and make sure it aligns with your anticipated profit timeline, whether you’re flipping a house, renting out a property, or expanding your business with new commercial real estate.
