Hard money loans can be a great choice for people who need funds quickly. These real estate loans are offered using a swifter and less stringent approval process compared with other types of private loans. Individuals interested in applying for a hard money loan for the first time may be confused about the approval process.
The good news is that the hard money loan application and approval processes are relatively straightforward and can be completed by just about anyone. Here are 5 steps to get approved for a hard money loan.
Understanding Loan Requirements
Before we describe the steps to apply for a hard money loan, it is worth understanding the loan requirements. All lenders require some type of due diligence from prospective borrowers.
For example, banks and other types of lenders typically ask for a wide range of documentation to verify the borrower’s background and the nature of their loan request. Such requirements can be viewed as excessive, and it’s not uncommon for lenders to keep asking loan applicants for documents or updates until the actual closing of their loan.
Hard money lenders stand out because they typically ask for less documentation or information about the borrower. So while most banks ask to see the borrower’s financials, credit, and the property they are pleading, hard money lenders generally look out for the property equity.
5 Steps to Get Approved for a Hard Money Loan
The hard money loan process is summarized in the following five steps:
The first step is to find a suitable hard money lender that offers the type of loan you are seeking. You can find many potential lenders using the internet, social media, or by networking with real estate professionals.
Before choosing any potential lender, it is important to look up their reputation, loan rates and terms, flexibility, and speed. Depending on your exact needs, you may set loan rates as a higher priority than speed or vice-versa. You can then contact your chosen lender to start the loan process.
2. Pre-Qualification and Application
The pre-qualification step is where the loan approval process actually starts. The lender first asks for information on the applicant and their property they will be using as collateral on their loan. As mentioned earlier, this property equity is the main factor hard money lenders look out for when assessing a prospective borrower.
The lender may also ask to view the applicant’s borrower credit and assess their financial stability. However, these are secondary to the property equity.
The loan application process also starts alongside the pre-qualification stage and it’s not uncommon for them to proceed on the same day. This step involves many key tasks including:
- Completing a loan application
- Allowing the lender to perform a credit check
- Showing proof of income
- Submitting a letter of explanation
The letter of explanation isn’t always required. However, it may help the borrower explain any inconsistencies in their financial history or mortgage. By the end of this step, the lender should have a good understanding of the borrower’s background and their reasons for requesting a loan.
3. Loan Processing
Once the applicant has completed their loan application, they can submit it to a loan processor. Following this, the processor orders a credit report and performs an appraisal of the property listed as collateral for the loan.
The loan processor’s primary function is to determine if the information the applicant has provided is accurate. During this step, they may look into numerous employment and financial aspects. This includes:
- Pay stubs
- Assets such as chequing and savings accounts and 401K accounts
- Outstanding debts
If the loan processor finds any inconsistencies or requires additional information, they will get in touch with the applicant and ask for documents or clarification. After the loan processor has completed the verification process, they will typically submit their findings to an underwriter to start the underwriting step.
4. Underwriting and Approval
The underwriter performs the vital duty of assessing the loan’s risks. They typically “underwrite” the loan based on the applicant’s finances and the real estate put up as collateral.
The underwriter’s job is to look out for the lender and ensure the borrower is a safe loan recipient based on their portfolio. They do this by examining the value and type of collateral being offered, the borrower’s resources, and credit history. In the case of hard money loans, the underwriter focuses primarily on the collateral property.
If everything checks out, the hard money lender will send the borrower a commitment letter that describes the various conditions for their loan. The borrower must then accept this offer within a specific timeframe.
The lender may then request additional items such as hazard insurance proof, property tax information and escrow contracts.
Closing is the final step in the loan approval process. This step typically involves the borrower, the lender, and a third-party entity known as an escrow agent. This escrow agent’s job is to hold onto assets and funds related to the loan until the borrower and lender have satisfied their respective obligations.
During this step, the lender must provide the borrower with all the relevant loan documents through the escrow agent. The borrower must then review and sign these documents. Once both sides have completed these steps, the funds will be transferred to the borrower.
Why Choose DFW Specialty Lending
Individuals interested in acquiring a hard money loan from reliable lenders with flexible rates can reach out to DFW Speciality Lending. We aim to make the application process quick and easy for first-time borrowers.
We typically complete the closing process within seven to ten days. However, we have also completed closings in as little as 24 hours. Please contact us to learn more about our loan programs and how we have streamlined the loan approval process.