How do Hard Money Loans work?

[Annwar Matani]

Hi everyone

Can someone explain to me from start to finish how does a HML work? I always get scared when someone suggests HMLs... I literally think of loan sharks or getting your house or assets taken away from you when I hear it LOL.

What does points mean? How much are closing costs? And I understand (I think) your making interest only payments until you pay back the loan? What if I finish the project in 3 months do I owe any more interest on it? 

Debating to use a HML for a flip or a BRRR. I'm trying to pinpoint my financial strategy in attaining these projects and HMLs are always suggested to me.

My goal this year is to buy my first investment. I want to operate from a place of logic, not fear. This forum so far has helped me very much in learning.

Thanks in advance 

[Travis Main]

I am eager to provide you with a comprehensive overview of the process involved in obtaining a Hard Money Loan (HML). Despite any initial apprehensions you may have, the process is far from intimidating.

As someone entrenched in the lending industry myself, it's essential to clarify that our primary goal is not property repossession. However, it's prudent to acknowledge the existence of a "loan-to-own" mindset in certain circles. Therefore, it's imperative to conduct thorough due diligence when selecting a company to facilitate your financing. Opting for a reputable entity within the industry is advisable, and seeking out reviews can provide valuable insights in this regard.

When seeking qualification for a hard money loan, lenders typically scrutinize four key factors: company structure, creditworthiness, liquidity, and collateral. Establishing a corporate entity, such as an LLC or corporation, under which the property will be vested, is a common prerequisite. While personal credit may also be evaluated, particularly if a company member holds at least 25% ownership, demonstrating sufficient liquidity is equally crucial. This entails furnishing bank statements reflecting ample cash reserves to cover the property purchase and potential rehabilitation costs to get the project started. Moreover, lenders often mandate reserves to ensure the borrower can meet ongoing financial obligations.

Selecting viable investment properties is another vital aspect of the process. Properties must align with the investor's objectives, facilitating purchase, renovation, and eventual sale with a favorable return on investment.

The pre-approval process varies among lenders but typically involves assembling financial documents, company records, member identifications, and the purchase contract. Subsequent steps include credit assessment and, upon agreement of terms, submission for underwriting. During underwriting, preliminary title searches, insurance procurement, and appraisal arrangements are initiated. Depending on the lender's protocols, either traditional or virtual appraisal methods may be employed. The latter, though more expedient, necessitates access to the property for interior assessment at the borrower's own convenience . Upon completion of the appraisal process and satisfactory underwriting outcomes, final clearance for loan closure is granted.

Should you want further discuss on any aspect of this process just let me know, I would be more than happy to hop on call.