What documentation is required for a hard money loan?
Hard money lending is increasingly becoming popular in the real estate market, thanks to the fast loan processing rates, increased flexibility, and ease of securing a loan with bad credit. Besides the common requirements that borrowers must meet, some loan documentation is required before closing the loan.
Ideally, two types of documentation are required for hard money lending: those that borrowers must submit to the lender and those that lenders must give as disclosures to the borrowers. Let’s first look at the disclosures that hard money lenders must avail to borrowers either before or during the loan closing date.
Hard money disclosure documents
- The privacy policy. Lenders provide this document to borrowers as a commitment that they will only ask and retrieve the necessary information while protecting their data privacy.
- The loan disclosure statement. This document provides important information about the loan, including the associated fees, rates, repayment period, terms and conditions, etc. The document also states the total cost of the loan and the obligation of both parties.
- Fair lending notice. Like traditional banks, the Equal Credit Opportunity Act regulates hard money lenders. This notice states the lender’s responsibility to treat all borrowers fairly and equally and to avoid any form of discriminatory practices.
- Deed of trust. This document identifies a third party that will assume ownership of the property used as collateral until the loan terms are fully satisfied. The third-party acts as a trustee and will only surrender the property deed to the borrower once the two parties are in mutual agreement.
- Promissory note. This document is a proof of promise to obey the hard money loan contract and to assume responsibilities at all times until the loan is fully paid.
- Escrow instructions. In partnership with the lender, the escrow company will decide on the best procedures that must be followed and satisfied for the loan to be processed and credited. The lender will then hand the escrow instructions to the borrower before closing.
Documentation required for a hard money loan
As stated earlier, the lenders will expect a borrower to submit some documents to be considered for the loan. Some of the common documents you’ll be required of to close a hard money loan are:
- Loan application. This is the first document to be submitted when applying for a hard money loan. The loan application indicates the loan’s purpose and your plan for repaying the loan. You may be required to state your income and indicate that you will use the property as collateral. Every lender may have their own rules on what must be included or omitted from the loan application.
- Forms of identification. Besides the application, it’s also necessary to provide at least two forms of identification. If you are borrowing the loan as a corporate or business entity, you may be required to produce corporate documents or any operating agreements. Other lenders may request entities to have a Certificate of Good Standing issued by the Secretary of the State.
- Preliminary title report. This document shows the Title of the property and helps confirm ownership.
- Proof of funds statement. Every hard money lender needs to know whether the borrower has enough money to pay the down payment. Any form of account or bank statement that shows the account balance, recent transactions, etc., can serve as a proof of funds statement.
- Proof of insurance. Most lenders want to ensure that the purchased property is insured against common risks such as fires and natural disasters. Some lenders are strict about the type of insurance policy they expect, while others are okay with the basic policies.
Optional documentation
Different lenders will have varying loan requirements and documentation. Optional documentation includes a credit report, rent roll to show the current income from the property, a copy of the lease, etc. Some may even request property photos and contractor bids for repairs. The latter is common with private money lenders who only finance habitable homes that the borrower has renovated.
Before applying for a private money loan in Florida, you should first pay attention to the loan documentation and the obligations that come with it. More often, lenders who ask for the necessary documentation are trying to minimize risk exposure and are more likely to be experienced in the industry. However, too much documentation can sometimes be a waste of time and resources, especially when the lender has no intention of using them.
Getting started with hard money loans
When looking for a private money lender, you want to inquire more about the loan documentation required. This will save you time and effort, plus you can easily tell the best lender to work with and those to avoid. Besides asking the lender to share a list of required loan documentation, you can also search the internet for a hard money contract template to know what to expect.
Before making your first application, be sure to choose the best lenders to work with. Most private lenders in Miami have varying rates and loan terms, plus some are more reputed than others. So you’ll surely find the best lender that meets your expectations.
