What is a hard money loan? How do they work? A rough money loan is a special type of loan that isn’t taken out from a traditional bank. It is an asset-based loan but instead the borrower gets their funds secured by real estate property companies or investors. For example, let’s say that Bob is a flip and fix developer who’s trying to raise funds for his recent real estate project, but he can’t get a traditional bank loan due to his credit score being extremely low, so he decides to get a rough money loan. Here’s a few things you should know about this special type of loan.
1. The types of paperwork to submit.
Now all lenders have different individual rules and regulations when it comes to the borrower’s financial history, debt to income and credit score. Fortunately, borrowers can increase their chances of being approved for a loan by giving lenders a well- detailed breakdown of the analysis of property after repair value (also known as ARV) and the renovations costs. Commercial contractors Dallas TX, or the contractor you are working with, can provide an estimate of your costs that you can give the bank. Some of the paperwork that borrowers will have to submit might include repair estimates, bank statements, sales contracts, tax returns, and even property appraisals.
2. The approval and funding process is much faster.
Applying for a rough money loan is fast, easy process, at least when you compare it to banks. Majority of the time the borrower needs to fill out a standard loan application and they can possibly get approval for the loan in less than an hour. They will be able to get their funds in less than a week.
After the loan is accepted, the borrower will receive the money in a matter of two weeks or less. With a bank there’s so much paperwork that you are required to sign and once the application is sent to the bank, it can take weeks and sometimes even a month to even hear back from the bank, and the property that the borrower was trying to invest could be taken away by another real estate investor at that point.
3. The biggest loan amount is 70% ARV.
How much money does the lender give the borrower? That is determined by the financial qualifications of the borrower and the specific traits of the property. Most of the time lenders don’t lend out more than 65-70 of the property’s estimated value after everything is fixed. By doing this, lenders make a safety net that covers the cost if things don’t work out or go as planned.
4. You don’t need a perfect credit score to get a rough money loan.
With banks, your credit score determines everything including your interest rate but with rough money loans they consider the value of the property more.
There’s a lot of rough money lenders to choose from, the best way to find a good lender is to look through the recommendations of real estate brokers or contractors. Before you apply for a loan, research and carefully review the terms and guidelines for the loan.