Hard Money Loans
Over the years, there have been a multitude of labels used to describe hard money loans, but they all generally describe the same type of loan: one that is more difficult to obtain than a bank loan.
You will also hear hard money lenders called by many names such as: Agents, Brokers, Loan Officers, Loan Brokers, or even mortgage bankers. Knowing the players, and the role they play is critical to getting the right loan, and getting it funded quickly. If you decide you need a private money loan, you want to be working with a loan professional who specializes in this arena.
In traditional lending, the loan officer’s primary role is on the front-end of the transaction. Taking the application, discussing loan programs and their qualifying criteria, and gathering the income and asset documentation from the borrower makes up the majority of their responsibilities. The loan file is then passed on to processing, underwriting and closing staff that see it through to settlement. Lenders or funding sources are provided to the loan professional by the company or bank the loan officer works for.
For hard money lenders, the front end of the transaction is just the tip of the iceberg. These highly skilled entrepreneurs orchestrate the entire transaction from start to finish and in some cases are funding hard money loans with their own money. While they may re-sell your loan quickly to a private investor to liquidate their funds, their skills and relationships with funding sources is vital to providing you with the hard money loan to fit your needs.
Hard money lenders manages and often personally performs all of the following processes required to get your loan closed:
- Creating your loan package, including the income, credit and asset documentation provided by you.
- Title ordering and coordating.
- Verifying payoff and reinstatements of loans as needed.
- Finding the best hard money loan, and advising you on the best program.
- Providing federal and state disclosures.
- Ordering real estate appraisals.
- Underwriting the file for investors looking for hard money loans.
- Matching you with a private investor to fund the loan.
- Determining the loan servicer (where you make your monthly payment) of your loan.
- Creating loan documents and mangae the loan settlement or closing.
Let’s take a closer look at what’s involved with each step.
Creating your loan package - A well documented and detailed loan package is key to finding a private investor willing to fund your loan. Expect to have the PML run a credit report, and ask you for tax returns for multiple years, financial statements, bank and investment statements along with a variety of other documents that provide proof of assets and liabilities. The PML will help you complete a loan application (frequently referred to as the 1003), as well as a document called a Statement of Information (SI). The SI assists the title company as they research the title of the property for liens and judgments. The documents required are unique to the type of loan and to each borrower’s personal financial situation. What separates a great private money lender from a novice or a lender inexperienced in private money lending is that they will intimately know which documents their investor will need to approve the deal.
Gathering and reviewing title information - A preliminary title report is an offer to insure your transaction by the title company and includes a summary of the existing liens, judgments, easements and other encumbrances on your property. It may be updated several times as well as immediately before closing. Title companies extend an offer to insure your transaction subject to the information in this report. Title insurance is a mandatory requirement of any investor. Filling out the SI form along with the application will give the title company and your PML the information they need to get your loan processed quickly. Your PML reviews this report and will discuss with you any detrimental or unexpected items that may prevent your loan from funding.
Ordering Payoffs and Reinstatements - Ordering payoffs and reinstatements for a loan is trickier than it sounds. A payoff is a document from a lienholder specifying the exact amount to payoff the lien entirely where a reinstatement is a statement from the lienholder (typically a mortgage or trust deed) which gives an exact amount to bring a delinquent loan current. Depending on the type of lien, the payoff may be obtainable in a few days, or it make take several weeks. In a conventional transaction, this function is typically handled by escrow. But a good private money lender knows that last minute problems often arise because of inaccuracies in these documents and the PML will often have their office obtain these documents on your behalf to make sure they are accurate. Private money loans are very loan-to-value sensitive and an unexpectedly high payoff can derail the loan at the last moment.
Advising you on the loan - Loans available to you will depend upon the PML, their specialty, and their investors available to fund the loan. Don’t expect a formal list and brochure of the loan programs like you would see at a bank. Everything is negotiable and the benefit of a PML is that the loan can be customized to meet the needs of the borrower and the investor. The key is to find the happy medium between the amount of profit required by the PML and the investor (realized through fees, interest rate, loan term, etc) to get the deal done.
Providing disclosures - Federal and state disclosures differ depending on the type loan. These disclosures provide you with key information about the loan you’ve applied for and are designed to inform and protect the borrower. A first mortgage loan on a residential property requires different disclosures than a commercial loan against a warehouse. The PML provides the necessary forms within the required time frames and reviews them with you.
Ordering and reviewing a property valuation - Property values will make or break a private money deal because the investor relies heavily on the collateral as security for the loan. Value can be determined many different ways, and the PML will know what method their investor(s) prefers. Many private investors prefer to visit the property themselves to determine value. The PML will almost always want an appraisal report performed by a licensed appraiser in addition to any other method preferred by the investor. A few investors will also use a Broker Price Opinion (BPO) to determine value or supplement other valuations. This report is provided by a licensed real estate broker, is substantially less detailed than an appraisal, and gives the investor a sense of what the property would list for in the current market environment. Automated Valuation Model (AVM) are reports that rely upon public records and special modeling software to arrive at a value. Whatever the method, or combination of methods required by an investor, your PML will order the reports, and coordinate access to the property.
Coordinating title and escrow - At the same time a PML orders a title report for the purposes of title insurance, escrow services are also engaged. In some states the same company will provide both the escrow and title services. In others, a separate company or possibly an attorney will oversee the process. The escrow services company will obtain any payoffs needed on the subject property, handle the disbursement of funds , conduct the loan closing, and record all applicable deeds and documents with the county. The PML also coordinates the transfer of the loan funds from the investor to the escrow company handling your transaction.
Underwriting and loan approval - In many cases the PML underwrites and approves your file based on the criteria requirements of the selected investor. Prudent review and documentation is required to justify a loan approval. The PMLs professional reputation and potential future business with investors will be impacted by the performance of your loan. Some investors may want to personally review the file or have their own designated underwriters review the loan package.
Providing the loan funds - The PML establishes relationships with investors or pools of investors that provide the money you need. You are matched with an investor willing to provide funds based on your loan package and the PML arranges for the those funds to arrive at the escrow company so settlement can be finalized. In some cases PMLs will use their own money to fund a loan and keep the loan for their own account, keep the loan in a mortgage pool they may operate, or they may sell the loan to another investor.
Determining the loan servicer - The loan servicer is the entity or individual that collects your monthly payment, provide periodic loan statements, year-end tax documents, and manage your escrow account for taxes and insurance if that was part of your loan agreement. The PML will typically also service your loan. Servicing loans is how most PMLs earn their living, and cover their office overhead. Servicing a loan also gives the PML the ability to communicate more quickly with their investor about the status of a loan. If the PML is not the servicer, the PML will transfer the loan documents to the designated servicer and make sure that you know where your first payment is made.
Final documents and closing - All of the required final deeds/mortgages and loan documents must be prepared by the PML , an attorney, or by a designated document preparation company. The actual closing and signing of loan documents process varies by state. Sometimes the PML will have a notary on staff and will supervise the signing of the loan documents, and in other states, an attorney, escrow or title company will coordinate the signing. The signing location and supervising entity will also vary based on the type of transaction. In many cases, the PML will be with you to make sure everything is in order and there are no questions about the final documents.