By Moolah List
By Moolah List
Private money loans are an ideal substitute for traditional bank loans, especially for a savvy, fast moving real estate investor.
Not only can hard money loans be funded faster, but they also come with less red tape and documentation requirements than a traditional bank loan.
Each lender will have different documentation requirements based upon their own preferences.
In this article we cover the most common documentation requests a borrower might come across.
Not all lenders will require all 13 documents, as documentation requirements will often be unique to each lender.
The hard money loan process is initiated by the borrower upon completion of a loan application.
The application includes the borrowers’ basic financial information as well as information about the collateral property.
The type of loan application used depends on the type of loan a borrower desires.
Like most real estate transactions, hard money loans involve a purchase contract known as The Purchase and Sale Agreement.
This document is a legally binding agreement which supersedes the buyer's offer to purchase.
It’s a detailed description of all significant and insignificant terms of the transaction and includes the following:
A deposit is held in escrow and not released to the seller until a certain date or until the transaction is completed.
This deposit is commonly referred to as Earnest Money and usually amounts to 1% to 3% of the sale price and is held in escrow until the deal is completed.
If the seller terminates the deal, the Earnest Money is always returned to the buyer.
However, if the buyer backs out of the deal, sometimes the Earnest Money is given to the seller, depending on the terms of the purchase and sale agreement.
Most hard money lenders want borrowers to have enough skin in the game to make it less likely the borrower will default on the loan.
They will require the borrower to provide a down payment equal to 20% to 30% of the value of the property, to protect against a downturn in property prices.
To ensure these funds are available, the lender will require a Proof of Funds Letter.
Usually, all that is necessary is the borrower’s most recent bank statement or a monthly statement from a brokerage firm.
Hard money lenders are no different from traditional banks when it comes to Title Reports.
A title company is selected by mutual agreement between the borrower and the lender.
The title company issues a preliminary title report and sends copies to the buyer, seller and lender.
The preliminary title report indicates whether transfer will take place with a free and clear title.
It will also indicate incumbrances on the property such as tax liens, mechanics liens or loans.
A Deed of Trust can only be used in certain states and is drawn up by a third party trustee.
The Deed of Trust creates a lien on the property for the amount of the loan.
This document is recorded in the county in which the property is located and serves as public notice that the property is collateral for the loan.
Since the Deed of Trust lacks a promise to repay the loan, it is necessary for the borrower to execute a Promissory Note.
The Promissory Note, also known as a Note Payable is a legal instrument that states the amount of money to be repaid, when it is to be repaid and at what interest rate.
With a hard money loan, the deed of trust of the collateral property is held in escrow until the loan is paid in full.
Escrow companies are used to help manage the transaction.
Escrow instructions provided by an escrow company are necessary to spell out exactly what is required of the borrower and the obligations of the lender.
Identification must be provided by the borrower.
In the event the borrower is a corporate entity, articles of incorporation, licenses and operating permits are provided for inspection by the lender.
If the borrower is an individual, two forms of identification must be provided, usually a driver’s license or passport issufficient.
When a borrower has completed a loan application they are given a Mortgage Loan Disclosure Statement.
This document eliminates any uncertainty regarding the terms of the loan including all fees and changes.
Via this document, borrowers can decide whether they want to proceed with this lender or continue shopping for a different lender.
The borrower is also provided with a Fair Lending Notice by the hard money lender declaring discrimination against a borrower due to race, religion, nationality, sexual orientation or marital status is illegal.
This notice was required as of 1977.
It further states that discrimination based on an area's racial composure, ethnic concentration or religious preference isalso illegal.
Closely related to the Fair Lending Notice is the Equal Credit Opportunity Act Notice.
It makes discrimination due to race, ethnicity, religion, marital status and other factors illegal.
And finally, there is a required disclosure notice concerning hazard insurance.
The Hazard Insurance Disclosure Settlement provides notice to the borrower about the amount of hazard insurance required for the property.
The amount of mandatory insurance can’t exceed the replacement cost of the property’s improvements.
Even though hard money loans require less documentation than traditional bank loans, a lender will still require substantial documentation and information about the borrower.
Having your ducks in a row and all your documents ready can accelerate the process and make your deal stand out to hard money lenders.