The US house flipping market is vast and provides lucrative opportunities to real estate investors. According to the first-quarter 2021 U.S. Home Flipping Report, nearly 32,526 homes were flipped in the first quarter of 2021, out of which 40.8 percent of homes were bought with financing.
Investors frequently choose conventional loans for their real estate investment projects. But the lengthy process of loan approval, rigorous underwriting, required qualification, and the high chances of loan or mortgage rejection make them go for more convenient financing options like hard money loans.
When purchasing a home or pulling out equity from an existing one, hard money lenders offer fast and flexible financing options. Hard money lenders look past a borrower’s credit score and primarily provide a hard money loan on the property’s after repair value (ARV) on offer as collateral.
The loan approval time of a hard money loan is shorter as compared to conventional loans and mortgages. Let us shed some light on the loan approval process and the duration it takes to get one.
How Long Does it take to Approve a Hard Money Loan?
As real estate investors are looking for funding sources that offer quick closing, most banks or conventional lenders fail to meet the deadlines. In this situation, hard money lenders offer a convenient way to raise quick capital.
The time taken to get a hard money loan depends on the type of loan you require, your current position in the loan process, and the condition of the loan. The process of obtaining a hard money loan is convenient. It requires less documentation and verification. Usually, it can take 1 to 14 days for a hard money loan to close, depending upon the situation.
Hard money loans for non-owner occupied properties can take up to 2-3 days for approval as they have fewer regulations. Whereas commercial loans can take a longer time to be approved. Some hard money lenders can approve the loan in a matter of minutes if the borrower meets all their expectations.
The lender takes a higher risk when considering financing your real estate investment project thus will assess the situation of the borrower and the feasibility of a project in order to approve a hard money loan. The common factors a lender will look for in a borrower are:
The need for loan to purchase a property
If you want to purchase a property to rehab and sell it eventually, the lender will look for the after repair value (ARV) and perform a thorough inspection of the property.
Refinancing on an existing property
If you are looking to refinance an existing property the lender will look for the equity built on it and its current market value.
The purchase price of the property
The price at which the borrower intends to purchase a property.
Profitability
The lenders will assess the business deal, the potential value a property can achieve, and look for opportunities to gain profit from it.
Capability to repay
The lender will need to know if the borrower is capable of repaying the loan. This also includes the cash required to pay the 10% to 50% of the loan amount as a down payment. They will also determine the potential of a property to produce income.
Exit strategy
A lender will look for what kind of strategy you are going to use to pay off the loan before its maturity date. This can include selling the property, taking another loan, or refinancing it.
After determining the risk and projecting the after repair value, a hard money lender will approve the loan according to the loan-to-value (LTV) ratio.
What Can a Borrower Do To Quickly Get a Hard Money Loan?
To fasten the process, a borrower must effectively present the potential value of their investment project to a hard money lender. Whether you are planning to purchase a commercial property or investing in a house flip, an investor must be able to present the following documents as part of the simple underwriting process.
- Purchase contract
- Two forms of identification (Individual investors)
- Preliminary title report
- Proof of insurance
- Proof of funds
Above mentioned documents are sufficient for an investor to borrow a quick hard money loan.
After reviewing all the required documents and discussing the terms with the borrower, a hard money lender will accept their application and proceed to approve the loan.
What are the Factors that Can Delay the Loan Closure?
While a borrower can easily obtain a hard money loan in a matter of days or a week, certain factors can further delay the loan approval process.
Preliminary report
The process can be delayed for 2-3 days if a preliminary report has not been prepared by the title company.
Title issues
The title issues refer to the problems related to a current homeowner’s full right to sell and ability to transfer the property. Title issues can delay the process by 10 to 15 days depending upon the ability of a title company to resolve all the issues.
Judgment Liens
Judgment liens are non-consensual as they are attached to the property without the owner’s agreement. Judgment liens allow a creditor to take possession of a debtor’s property. This type of judgment and liens must be settled in order to process a hard money loan. This can delay the process by almost 10 to 15 days.
Proof of insurance
A borrower will have to provide proof of insurance to prove that they have the policy to cover the property from potential damages. Lenders can accept the following as proof of finance:
- Copy of Home owner’s full insurance policy,
- Certificate of insurance from the insurance agency,
- A letter of declaration including all the information related to the policy.
Collecting and providing all the essential information can delay the approval of a hard money loan by 2-3 days.
When Should You Take a Hard Money Loan?
Hard money loans are specifically designed to quickly raise funds to invest in a real estate investment project. An investor can make use of the hard money loans to finance their purchase for a fix and flip project, build their rental portfolio or renovate their existing property.
Fix-and-flip project
Investors can use the loan amount to purchase a property and cover the cost of repairs. This type of project closes within 10 to 15 days and therefore requires a loan that can be paid off in a shorter duration. This makes a hard money loan the perfect option for an investor to easily invest in a fix and flip project.
Building Rental portfolio
An investor can use the hard money loan to purchase a distressed property, renovate it, and put it on rent to ensure cash flow and start a passive income. An investor can refinance the existing property to purchase another one and put it on rent after the necessary repairs. In this way, an investor can use the hard money loans to acquire multiple rental properties and build their rental portfolio.
Renovating your existing property
Investors can take a hard money loan to renovate their existing property to further sell it or rent it to tenants. Hard money lenders provide flexible loans to ensure that they cover all the repairs and renovation costs.
The Bottom Line
Hard money loans are a convenient way for an investor to raise quick funds. Investors don’t need a perfect credit score to obtain a hard money loan. One can get a hard money loan in a matter of days.
Get access to hassle-free hard money loans with seasoned lenders like 14th Street Capital to quickly finance your next real estate investment project. Investors can get faster preliminary approvals that ensure loan closure within 5-10 days. Experience the ease of obtaining a hard money loan with 14th Street Capital, the best funding source for your real estate investment.