Scott CraftEssential Tips for Faster Hard Money Loan Approval
As real estate investors, we understand that obtaining financing is just one step in the overall process of completing a successful fix-and-flip project. You want to get loan approval as quickly and seamlessly as possible, and that’s also what your lender wants. There are several steps you can take as an investor to help make the process faster and easier.
When you approach your lender with a new deal, your level of preparedness is the best way to show your lender not only that you have a solid project, but that you are also a reliable borrower they want to lend money to. Here are the best ways to show your lender that you mean business.
While hard money lenders are not banks and don’t have the stringent requirements of banks, they still need to complete a full file for your loan. This includes documents such as your tax returns, pay stubs, bank statements, entity documents, and your scope of work. If you have all these documents ready to go and can just hit SEND on an email, that will make your lender’s life much easier and get your file into underwriting that much quicker. If you really want to impress your lender, have a spreadsheet with your past real estate experience or a resume to show this lender why they want to work with you.
Have your numbers ready.
Hard money lenders largely base their analysis of any deal on 3 primary numbers:
- Purchase Price
- Rehab Budget
- After Repair Value (ARV)
If you have those three numbers already in hand when you approach your lender, it eliminates a whole lot of guesswork. Ideally, you either have the property under contract or you are negotiating a price with the seller; you have walked through the house with your contractor and have their bid to do the work; and you have solid comps prepared by either yourself or your realtor that show what the house will sell for upon completion.
Be ready to show your comps.
As part of demonstrating that you’re prepared and have a good understanding of the numbers, be ready to send your comps to the lender so that they can see what you’re basing your ARV on. Every lender will do their own due diligence, whether that’s an appraisal or some other sort of internal valuation, but they also love to see what you’re looking at to determine the strength of any given deal.
Have a contingency in your budget.
If you provide your budget or scope of work to your lender and it already has a line item for “Contingency,” it tells your lender that you have a good understanding of the reality of rehabbing a house. You can get all the contractor bids in the world, but you can’t truly know the exact cost of what a rehab will be for a number of reasons.
One reason is fluctuations in material costs—tariffs, supply chain disruptions, inflation, and any number of other factors outside your control—can increase your costs from what you originally anticipated. On top of that, you may not be aware of a hidden defect in the house that you may discover once you start the rehab. Having a contingency and understanding why it’s so important to do so will give your lender confidence in you and your abilities.
Be ready to answer questions.
Your lender is going to have questions for you. The more prepared you are to answer these questions, the better you look to your lender. These questions differ for every borrower and every deal, but you can get ahead of them if you think about what you might be asked.
Question: I see this house is on a busy street. Have you taken that into consideration when running your comps and getting to your ARV?
Answer: Yes, I know that it is. That’s why I’m discounting the ARV of other comps from less busy streets by X%, and I’m putting the most weight on this one house that sold on the same street.
Question: I see in the listing that they mention this house has structural damage. What needs to be done to take care of that?
Answer: I’ve already got an engineer’s report and a bid from my structural contractor to fix it for $X. I’ll send the engineer’s report along with the bid to you right now.
Question: All of the comps you sent show a very modern floor plan, but your house has a very outdated feel, over and above just the finishes. Are you going to address that?
Answer: Yes, my plan is to remove the wall between the kitchen and living room to give it a modern, open feel. I’ve already had an engineer look at it, and it’s not a structural wall.
Question: This looks like it will be the biggest dollar-value project you’ve done. Are you sure you’re prepared to do this size of a deal?
Answer: I do know that this will be the biggest project I’ve done, but I’ve been successful in my past projects. I’ve reached the point where I feel much more comfortable with this business, the process, and my contractors, and we are very in sync with how we work together.
These are just some of the types of questions a lender will ask you while underwriting your deal. The better prepared you are to answer anything about your deal, the more trust you will instill in your lender.
Have a backup plan.
With everything going on in the world today—market volatility, high interest rates, consumer confidence issues, etc.—even “the best laid plans of mice and men often go awry,” as the saying goes. There is always the possibility that you won’t be able to sell the property for what you expected you would, so it’s wise to have a backup plan to get out of the loan.
The most common backup plan to get out of a fix-and-flip that isn’t selling is to pivot and turn the house into a rental property. If you can tell your hard money lender that you have already run numbers as a rental, already spoken with a takeout lender, and already been preapproved for a long-term, non-owner-occupied loan as a backup plan, your lender will be that much more confident in giving you the loan.
Conclusion
The short and long of it is that you need to be professional. When you get your lender what they need, can answer questions about your project, and show them that you’re well prepared, you can get through the financing aspect of the project as quickly and smoothly as possible so that you can spend more time on the real money-making activities, like finding more deals and getting your existing projects fixed up and ready to sell.