Commercial Mortgage Frequently Asked Questions
Rehab Fix & Flip FAQs:
Q: What is a private money loan or hard money loan?
The most common request for a private money loan (often referred to as a hard money loan) is for a loan secured by real estate loan with the loan amount being almost wholly based on the equity in the collateral rather than the credit of the borrower. However, in this day and age private money lenders are often securing their loans with a very wide variety of collateral including business interests, water rights, mineral and gas interests, etc. Hard money loans are typically issued at much higher interest rates than conventional loans and are almost never issued by a commercial bank or other deposit institution. Many hard money mortgages are made by private investors, generally in their local areas. Typically, and exceptions aside, the average hard money lender will not lend beyond a loan-to-value ("LTV") of 65%. Most private lenders prefer to maintain a LTV below 60%. Certainly, the lower the LTV ratio the easier it is to get a hard money loan. Borrowers who have low credit scores or cannot otherwise verify their income generally have little hope of getting a conventional loan even though the collateral might be amazing. Hard money lenders tend to fill the void and allow borrowers the opportunity to purchase assets or refinance other loans in order to fully take advantage of big opportunities. Hard Money is a bridge loan. Borrowers can fix their credit and refinance to a conventional loan in a year or two. Also, conventional lenders do not loan on certain properties or are not willing to utilize certain collateral to secure a loan and a hard money loan often comes to the rescue in such cases.
Q: What documents do you need from me?
For a general list of the documents that we need you to provide to us, please see Documents Needed. Each hard money loan is unique. As a consequence, sometimes a specific loan requires specific documents that are not applicable to most other loans. These types of hard money loans are treated on a case-by-case basis. The underwriter that is assigned to your loan will determine if there is a need for additional documentation that may be required for your individual loan.
Q: What is an executive loan summary?
An executive loan summary is a brief summary of what the borrower wants from the lender. Often a loan summary will contain the desired loan terms, an estimation of the collateral's value and the logic behind such estimation, a review of the borrower's financial situation and any and all exit strategies that the borrower will implement to pay off the loan. If there is anything associated with the hard money loan that would be unique or needs an explanation then that is also often made a part of the loan summary.
Q: What is a Preliminary Title Report and how do I get one?
Preliminary title report, or "PR", is provided by a title company and it shows the present status of title to a piece of real property collateral. This report lets a lender know what liens may need to be paid off, among other things, and is essential to close your hard money loan. Most title companies will provide a borrower with a PR free of charge or for a nominal fee of $100.00.
Q: What is a Broker Price Opinion ("BPO)?
Broker Price Opinion, also called a "BPO" or a Realtor Opinion, is an informal valuation provided by an industry professional. In other words, a BPO is a document a real estate broker or agent provides that gives an estimated value for the collateral and an explanation of how the broker or agent came up with that estimate.
Q: Is my financial statement really important?
Your financial statement can make or break a loan. A financial statement that is inaccurate or misleading tends to cause a lender to distrust you and lowers the likelihood that your hard money loan will close. However, an accurate and reasonably substantial financial statement can be very persuasive because even if you are not rich, a lender will want to do business with someone that has an established financial track record and who comes across as dependable and trustworthy. If your financial statement does not show a mid to high net worth then that is fine because as long as you are financially responsible then you are the type person we want to do business with.
Q: Why do you want to see my credit report?
The credit report is part of what we consider the financial snapshot. The report helps lenders see where you are financially.
Q: What are articles of incorporation or organization and why do you need them for my loan?
We primarily lender to companies and companies are generally corporations or limited liability companies. In order to determine who can actually sign on the loan documents both the lender and the title company that will be closing the loan must see a company's organizational documents. The most important corporate document is usually its articles of incorporation (for a corporation) or articles of organization (for an LLC). These documents let a lender know who owns the company and/or who manages it.
Q: What are bylaws and operating agreements and how do they pertain to my loan?
Bylaws and operating agreements are documents that tell a lender how a company is run and who has the right to run it or receive distributions from it. A corporation often utilizes bylaws or shareholder agreements and limited liability companies often utilize an operating agreement. Most lenders (including us) require that you provide the appropriate documents prior to funding a loan.
Q: How long does the loan process take from pre-qualification to funding?
We try to make sure that a loan closes in as little as 7 to 14 days from the day that all of the due diligence materials have been provided by you. These materials include, but are not limited to, appraisal report orders, open/order escrow and title insurance. On occasion when the borrower or the property have liens, judgments, and/or title issues, a lender require that these items be satisfied first (or can be satisfied upon close of escrow) during the loan process. However, such issues can prolong the loan process thus closing will take longer. We encourage every borrower to be prepared to provide all documentation requested by a hard money lender promptly and to satisfy conditions as quickly as possible to help expedite the closing of their loan.
Q: What if a borrower has bad credit, is in bankruptcy, or is in the process of foreclosures? Will this hinder such a borrower when dealing with hard money lenders?
Generally, no. Many hard money lenders can still fund a loan despite the borrower being in a tight financial situation.
Q: Can a lender close my loan if the property has tax liens and judgments?
Generally, yes. Many lenders can close loan transactions with tax liens and judgments tied to the property. These are thoroughly discussed with the borrower once the title report is received and reviewed. These liens are generally paid off at closing.
Q: What if the borrower is currently in a short sale, or currently in a foreclosure, or has had a previous foreclosure? Will the borrower be denied a loan?
Generally, no. Many hard money lenders will still be able to fund a loan even if the borrower is involved in a short sale, currently in a foreclosure, or has had a previous foreclosure.
Q: What are the fees involved and does every hard money lender require these fees to be paid up front?
Most hard money lenders charge the usual fees such as origination, underwriting and/or processing, inspection (in lieu of an appraisal report), and loan document preparation. There are also be 3rd party fees involved like escrow, closing, title insurance, appraisal report, credit report and other fees. Fees are always disclosed to borrowers when a loan commitment is made and the fees are generally paid from the loan proceeds at closing.
Q: What types of properties will lenders lend on?
All types real estate, see Loan Programs for details.
Q: Is an appraisal required? Will lenders accept my appraisal?
.Generally yes. We usually order the appraisal through an 3rd party appraisal management company however some exception my apply.
Q: Do lenders charge prepayment penalties?
Our programs vary depending on the situation.
Q: Do hard money lenders lend money for repairs?
For the most part, yes. Repair money is usually held in escrow and will be released in draws as the renovations are completed. The borrower is responsible for paying their contractors and material men.
Q: Do I need to have a property under contract before applying for a loan?
Even though you can be pre-approved prior to placing a property under contract, most lenders require a contract be executed prior to moving very far along in the process.
Q: Can a borrower close with his attorney or do lenders generally require a borrower to close with its attorney? What about preparing loan documents?
All loans are closed by independent 3rd parties. Almost every lender will prepare the loan documents associated with a loan and provide a copy to the borrower fairly early on in the process so that the documents can be reviewed and negotiated. Final documents are always submitted by a lender's attorney