Real estate loans are plentiful to some and come in many different types. Real estate investors prefer using something called hardmoney loans. The reason real estate investors prefer the hardmoney loans are that they allow them the opportunity to buy a property quickly and fix it up for flipping. There are both good points and the negative side to these types of loans.
Part of the application process for obtaining hard money funding is to provide something called a ‘Scope of Work’. This is a worksheet that provides details about every kind of repair that the investor is planning to make on the property to rehab it for resale. This is a gauge that the hard money lender will use against the property in question. If any repairs are done to the property that is not listed on the worksheet, reimbursement may be difficult to get from the lender. The purpose of the worksheet is to be sure that both the lender and the borrower are seeing ‘eye to eye’ on what the project will encompass. There is usually some leeway allowed by lenders during the process of the rehab when unforeseen things come up.
Investors usually require at least twenty percent as a down payment on hardmoney loans. Most lenders will also want to see that the borrower has reserve money sitting somewhere in a bank account. The monthly income that the investor makes is a big consideration for the approval of the loan. The credit rating of the borrower has little influence in the consideration of loan approval but other factors about the cash on hand and the property potential is far more important to the lender. Each lender will have their own specific requirements for issuing funding but most will be more concerned with loan to value.
The repairs that the investor plans to make on an investment property will be estimates. There are always many variables when the actual work begins which is just the way it is in the ‘real world’. For this reason it is usually a good idea to submit an estimate that is higher than you think the repair will really cost. This way you have a better chance of not running into a situation where you need to ask for extra funds. If there is extra money left, then you can return it to the lender or keep it as a reserve but it is not something that should be spent for any other purposes. Hardmoney loans are only to be used for the purpose of buying and repairing the property as listed in the loan agreement.