Financing Your Real Estate Deals With Hard Money Loans: Understanding The Lending Process

If you're interested in rehabbing or flipping a property and plan on financing via a hard money lander, there are several important things you'll need to know to get this kind of deal done. Here's how things work once you get the house under contract: All hard money lenders have different requirements. One of the best ways to find a trustworthy lender is to talk with other successful investors to find out who they have used to fund their loans. Some of these lenders will loan money based on a percentage of a property's appraised value, while others will loan based on a percentage of the property's purchase price. Any legitimate hard money lender will give you a breakdown of your fees along with their terms, including:

1. Loan Points

2. Closing Costs (Escrow Fees, Document Fees, Notary Fees)

3. Interest Amount

Here's the hard money lending process on a typical deal:

Step 1 - Get Pre-qualified: speak with the lender and determine what they require of you and your deal. Understanding how hard money works before hand will save you headaches and will ensure that a potential lender does not think twice about working with you, despite your deal.

Step 2 - Locate and place a good deal under contract.

Step 3 - Contact the hard money lender and let them know what your contract price is, the estimated cost of the repairs, and what you believe the ARV (after repair value) is.

Step 4 - Get the property appraised; the lender will either send their own appraiser or will give you an approved list of appraisers that you can choose between.

Step 5 - They may request some of the escrow documents to verify your paperwork.

Step 6 - They will decide whether or not they will fund the loan and will let you know what amount and under what terms it will be.

Step 7 - The loan is closed - Like with a conventional loan, you will do the closing at a title company or lawyer's office. The hard money lender will place the loan amount into escrow at the title company, and you (the buyer) may have to put in money or might get it back, depending on the deal. Additionally, the title company will issue checks as indicated on the HUD; typically, a big one to the seller and points back to the lender. If there's cash to be paid to the buyer, they would issue that check as well. The title company will ensure that all the proper paperwork is completed in the correct order and that funds are sent to the appropriate people.