What are Hard Money Loan Requirements?

An average person — and even real estate agents or conventional mortgage lenders — may have some questions on how hard money loans work. Maybe you know that more equity in the property, in the 30-40% range, is required than with a typical loan. Hard money loans are generally considered asset-based, so lenders used to look at the protective equity position (the difference between the real estate value and the loan amount) to decide if it was a good loan. But that mentality has changed significantly, as hard money loan requirements have expanded to keep pace with the demands of an ever-evolving industry.

This blog post will cover both general and specific hard money loan requirements, starting with a high-level project overview and moving into specific underwriting details. I’ll provide details for the items you need to know, covering the following sections:

• High-Level Project Overview
  - Executive Summary
  - Budget
  - Equity Position
  - Exit Strategy
• What You Need to Get Approved
  - Individual Information
  - Entity Documents
  - Property Information
  - Construction Loan Conditions
  - Existing Mortgage
  - Tenant Information
  - Insurance

High-Level Project Overview

Going into a project, you must be able to quickly explain what you’re planning: the cost; how much of your own money you have to spend; how long it will take; and the expected value of the finished product.

As a borrower, prepare to make your overall loan package as clear as possible for the mortgage broker and/or hard money lender. The more detailed and organized you are, the likelier you are to get approved.

You don't want to send a mortgage broker or hard money lender a mess of unlabeled documents to waste 30-45 minutes organizing and figuring out your loan request — only to realize it’s impossible.

Be clear, concise and organized with your loan paperwork to help the (busy) lender decide within one or two minutes whether to continue reviewing your loan request.

Executive Summary

The executive summary is not always required, but for larger projects like a 100-unit apartment building construction loan, it can make a big difference to prospective lenders. A high-level yet highly detailed executive summary with answers to all the lender's likely questions saves everyone —from the borrower, broker and lender — valuable time evaluating your project.

Budget

The budget, also called a scope of work, must estimate costs in line with average costs for similar projects. For example, if you’re building a spec home on a steep residential lot, your budget will reflect a much larger excavation cost than a spec home on a flat lot. Most successful borrowers submit the budget provided by their general contractor (GC). If they themselves are the GC, they’ll create the estimates and submit their budget along with the loan package.

Equity Position

How much money will you invest in this project? For a refinance, how much equity is already in the property? Taking it one step further, you’ll want to document how much equity will be in the property after project completion.

Lenders want borrowers to have “skin in the game,” which means they've put their own money at risk along with the lender's. If you don’t have any money or equity at risk, don't expect to get a hard money loan.

Exit Strategy

I’ve written an entire blog post about the importance of your exit strategy. To sum it up: you need a well-thought-out exit strategy prior to applying for a hard money loan.

Most of the time, this exit strategy is clear to both borrower and lender — you’re either going to sell or refinance.

A Seattle investor recently requested a $600,000 hard money second mortgage on an existing rental property to buy another home to use as an Airbnb. When I asked about the exit strategy, there was silence. They didn’t know how they’d pay off the loan or even how to respond.

But their non-answers gave me all the answer I needed, which I recommended to the lender: pass on this loan.

Ambiguity makes a lender uneasy. Know and make clear your exit strategy at the time of application.

What You Need to Get Approved

In this section, I’ll cover the specific items to submit with your application. Note that some, like entity documents, might not apply to your situation if the title will be under your name rather than a limited liability company (LLC) or corporation.

Individual Information

All hard money loans require some individual application information, including:

1. Application:
   You'll provide all your personal information. Be thorough since some of the information, like a Social Security Number (SSN), will be used to run a credit report and background check.
2. Borrower’s Authorization:
   This authorization allows FCTD to check credit, background, open title and escrow, order payoff demands, and verify payment history and other underwriting activities.
3. Photo ID:
   The front and back of your photo ID is required. A photo ID helps prevent fraudsters from using hard money to pull off a scam. They can be used to verify mug shots on background checks, among other forms of prevention.
4. Two Months Bank Statements:
   Some hard money lenders require two months of borrowers' personal bank statements to verify liquidity. FCTD makes a practice of requesting these with each loan.
5. Credit Report:
   Hard money lenders want borrowers with good credit because they're more likely to qualify for long-term bank financing at the end of the loan.
6. Background Check:
   A clean background check is required. While a perfect past is not mandatory, there can be nothing recent, and no financial crimes.

Entity Documents

Since most of our borrower clients are real estate investors, the loans FCTD originates are usually held in an entity like an LLC, corporation or trust. Below are the items you’ll need to provide if you're vesting in an entity:

1. Articles of Organization (LLC) or Articles of Incorporation (Corporation):
   If you don’t have the original, download a copy from the state of organization.
2. Operating Agreement (LLC) or Bylaws (Corporation)
   This document lists the owners, what percentage of the entity each owns, and who can sign documents on behalf of the entity. (Make sure to sign the operating agreement or bylaws — half the ones we see are unsigned.)
3. Employee Identification Number (EIN):
   Send in your Federal Tax ID Number (FEIN) document. If don’t have the original, you can send the number. (Hint: it will be on your previous tax returns.)
4. Certificate of Good Standing:
   Some lenders require a Certificate of Good Standing, or Certificate of Status, showing your entity is current. These are easy to order. Log onto your account with the secretary of state and request a certificate. They cost $5-10 and are available for immediate download.

1. Order a Certificate of Good Standing from your current state.
2. Sign up for a registered agent service in the new state. I use Northwest Registered Agent, an easy-to-use online portal. 
3. Sign up in your new state. Most secretary of state websites are easy to navigate.

Property Information (Appraisal, BPO, CMA)

You won’t be asked to order an Appraisal or Broker Price Opinion (BPO) — that’s the job of the mortgage broker or hard money lender. However, expect to provide recent interior and exterior photos of the property. (If you're buying a property with numerous online photos, you won’t need to provide photos.)

Each lender has different appraisal requirements.

Construction Loan Conditions

Construction loan requirements encompass both fix and flip and ground-up construction projects.

When underwriting construction loans, we ask for the following items:

1. Contractor’s License:
   We verify the contractor is in good standing, with a consistent track record.
2. Contractor’s Resume:
   Most contractors have a readily available list of past projects they can provide to lenders.
3. Contractor’s General Liability Insurance:
   Contractors will need to provide this proof of insurance to proceed. 
4. Construction Agreement between Borrower and Contractor:
   We want to see any existing agreement between the borrower and general contractor. 
5. Plans:
   You or the GC will need to send over the plans for underwriting review. 
6. Permits:
   If permits are approved or pending, and you're project is shovel-ready, you’ll want to specify this in the executive summary. You'll also send copies of the approved permits.
7. Budget:
   The GC will provide a budget with a buffer for additional costs that often arise during the rehab or construction process. 

Existing Mortgage(s)

For a refinance, we need a copy of the most recent mortgage statement, which we send along with the Borrower's Authorization to the escrow officer, who will order the payoff demand. If we’re paying off another hard money loan, like a private individual you’ve been paying directly without mortgage statements, you’ll need to provide their contact information.

1. Contact info for existing lender (mortgage statement preferred)
2. Payoff Demand (escrow orders the payoff)

For a second mortgage, blanket or cross-collateralized loan, you’ll need to provide the following:

1. Promissory Note (or notes, if you’re using multiple properties as collateral)
2. Deed of Trust
3. Closing Statement from when you took out that loan(s)
4. Intercreditor Agreement
   For second mortgages and cross-collateral loans, FCTD works with your existing mortgage holder(s), and the new lender in second position to complete an Intercreditor Agreement, which allows the first and second lienholders to share information. An Intercreditor Agreement would come into play if you defaulted on your first mortgage. The first lender would notify the second lienholder that you're in default. The second lienholder could accelerate their position under the provisions of the cross-default agreement in the signed loan documents. This allows the second lienholder to protect their position in your property.

You probably didn’t realize it was so complicated!

Tenant Documents

For rental properties, we require tenant documents, including:

1. Lease Agreement(s):
   A fully executed copy of the lease, signed and dated by lessor and lessee.
2. Addendums:
   This includes lead-based paint disclosures and other addendums like pet rent or storage unit use on site.
3. Sublease Agreement:
   This is usually for commercial properties.
4. Lease Payments:
   Some NonQM lenders will ask for 12 months of receipts for each unit and evidence of rent deposited into the bank. For example, I had a client with several tenants who paid in cash. The client put the cash in a safe rather than depositing into their checking account. Make sure to let your broker know this up front so it doesn’t create extra problems.
5. Rent Roll:
   For multi-tenant properties, submit a rent roll showing rents that are due and rents that have been collected. If you’re buying a vacant building, submit a market rent estimate from a commercial real estate agent.

Insurance

Insurance is mandatory on all financed properties. Below are key aspects of property insurance:

1. Evidence of Insurance:
   Most borrowers just send FCTD the insurance agent contact information and we take care of the rest.
2. Correct Mortgagee/Loss Payee:
   This lists the lender as having an interest in the property in the event there is an insurance claim or the policy lapses due to non-payment.
3. Adequate Coverage:
   Most hard money lenders want up to $1 million of liability coverage and have the property insured up to replacement value.
4. Flood Insurance:
   Properties in a FEMA Flood Zone will require Flood Insurance.

Get Started Now

Getting organized and doing your homework is the best way to breeze through the hard money loan requirements. As brokers, we originate 500+ loans each year — and of those, there may be only four or five borrowers who are highly organized with all their documents available. It's understandable. Most real estate investors are busy looking at future properties or working on  existing ones. Yet, if you have it in you to be highly organized, it's worth it. Do yourself a favor and put your paperwork together before you apply for a faster and much smoother process.