8 Questions You MUST Ask Your Hard Money Lender Before You Get A Loan (in 2021)

Do you need funds to finance your fix and flip?

A hard money loan is an excellent way to get the money you need to buy properties. But if you’re shopping around for the best hard money loan, price shouldn’t be your only consideration.

To find the best loan product for you, you need to ask the right questions. Fortunately, as a hard money lender, I’ve been asked a ton of questions by my friends and listeners wanting to know more about it.

Because of that, I’ve been able to narrow the 8 questions you should ask your hard money lender before you decide to get a loan from them.

What are their terms

Different lenders have different maximum amounts for what they would lend on a property. You could get a maximum of 80% of the purchase price and 80% of the construction loan. It’s rare to find a lender who will shoulder 100% of the purchase price.

Some lenders also do cross-collateralization where they’ll take equity from another property as down payment for the property you’re taking out a loan for.

There are also lenders who will only put a percentage of the after-repair value (ARV). They don’t care about purchase price and construction costs.

Just make sure that you have 10-20% of the down payment and enough reserves for closing costs and rehab costs.

Where can they lend

Some lenders operate on a super local niche market. Some work across an entire state. Some cater to properties across different states. And then there are those lenders who cover nationwide.

You also need to know what type of properties they lend for. There are lenders who cater to single-family and duplex up to fourplex properties. Other lenders can go up to fiveplex, sixplex, eightplex, and even 100-unit multifamily buildings.

Be aware though that some multifamily are mixed-used commercial buildings with retail at the bottom. Due to COVID-19, lenders have stopped loans on commercial properties, so you might have trouble getting a loan for that type.

Also, know that almost no one will give you a loan based on land. So if you want to buy land, you’ll have to pay in cash.

What are the credit score requirements

Some lenders have no credit score requirements. They may just look at whether it’s a good deal and whether you have a good character. There are those who are stricter and may require a minimum of 620 or 650 credit score.

Some also have citizenship requirements. So you’d have to show you have a visa or a Green Card. If you can’t meet these requirements, then partner with someone who is a citizen who can sign for the loan.

Do they have prepayment penalties

While some lenders have no prepayment penalties, others could charge penalties of 3-4 months.

Some lenders do transactional funding where you buy and sell at the same closing to another buyer. You just have to pay the origination, processing and closing fees.

For longer terms like a 24-month loan or 5-year bridge loan, while they have better interests, the prepayment penalty is half of the term of the loan.

How do they fund construction deals

Let’s say your property has a $1M purchase price. Your budget for the construction loan is $100,000. With an 80% construction loan, your lender would shoulder $80,000.

But, no lender will give you all of it at closing to do what you want with that money. Payout is usually done in draws, so the next question you should ask is…

How do they handle their draw process

We usually pay a little bit up front to pay for a feasibility study. So you would pay for the first phase of the construction. After that is done, we’ll send inspectors who will take pictures. Once we approve this, we’ll release 80 cents to a dollar of what you’ve spent so far.

Basically, it works like a reimbursement process.

How much do they charge for their loan

When you talk to your hard money lender, ask about their origination fees, and processing fees such as desk fee and legal fee.

They might charge 10% for their note rate and 1-2 points for the origination fee. Expect also that you’d have to pay $1,500 or so for the processing fee.

If your property is in an attorney-close state, which means they use attorneys instead of title companies, like New York and Georgia, then they might also charge you $500 for the use of their in-house attorney.

How fast can they close

Typically, a hard money lender should be able to close in 14 days. Some take a shorter time. Some take longer.

What’s important is that you ask your friends who’ve used that lender about their own experiences. You don’t want to face getting the rug pulled from under you on the last day when you’re supposed to close. If that happens, you could end up losing your earnest money deposit.

Another question you should ask your lender is what do you need to actually close on a deal.

Ask them what kind of documentation they need for you to borrow. Usually, they might ask for your identification and 2 months’ worth of bank statements to show your liquidity.

You need to show that you have the money to successfully complete the deal. This will be for the down payment, rehab costs, closing costs, and 6-8 months of holding costs which include taxes, insurance, and interest payments.

Conclusion

There you have it. Make sure you ask these questions to your hard money lender to make sure that you’d be getting the best loan for your flip.

Do you think I missed a question that you should be asking your lenders? Let me know by asking in the comment section below.