Steps to Take Before Applying for a Hard Money Loan
Getting a loan can be stressful, especially if you’re experiencing rejection from lenders. A hard loan is a loan that you can obtain using collateral. They’re easier and faster to get than traditional lenders like the bank. You don’t have to be worried before applying. Instead, you can avoid the challenging processes you would face with other lenders.
If you’re thinking of getting a hard money loan to support your business, there are a few steps to take so that the process goes smoothly.
1. Determine How Much Money You Need
Before applying for a loan, you should determine how much money your business needs. Some small businesses only require about $3,000 to get up and running, while a medium-sized company may need more. Knowing how much money you need allows you to find your lender accordingly. Some lenders don’t loan money below $3,000, while microlending platforms, such as Lendee, go as low as $100.
When offering collateral, you want to show your lender how you can improve the property and increase its value with the loan you’ll obtain. You must determine how much money you need to transform the property to generate revenue.
2. Do Your Research
Don’t be discouraged if other lenders, such as banks or credit unions, reject your application. It doesn’t mean you have limited options and must opt for the first lender that approves you. Take your time to compare interest rates and find a company that offers you the most favorable arrangement.
A low credit score may be holding you back from finding a suitable lender. Luckily, your credit score is not a priority when you need a hard money loan. Having enough collateral will determine your chances of approval. Providers like Lendee allow all applicants to apply for a loan regardless of their credit score. So if you’re worried because you don’t have enough collateral or credit, Lendee is an excellent option to obtain a microloan for your business.
3. Present Your Property
As mentioned, a hard money loan is supported by collateral, not your credit score. The next step is to prepare for presenting the value of your collateral. If it’s real estate that you’re offering, you will need architectural plans, construction budgets, and any other documentation showing the property’s value.
You must show your lender what you plan on doing with the funds and how it’ll affect the property. The goal is to demonstrate the improvements you’ll make to increase the property’s value. The lender needs to know that they’re making a safe investment and your property is valuable.
4. Show Your Financial Plan
Lenders want to feel secure when loaning money. They want to see that they’ll be getting their money back, so you should prepare a financial plan. You should be able to present how you intend to pay back the loan and where the money will come from.
5. Choose the Right Term Length
While researching, you should select a lender offering you a term length that best suits your needs. Term length means the duration of the loan. Most lenders offer up to 12 months to repay the loan. Some lenders offer up to five years to repay the loan. Choose a realistic term based on your needs and capabilities and find your lender accordingly.
6. Additional Documentation
Providing your lender with additional documentation will help improve your chances of approval. Some companies will require you to provide information such as pay stubs, W2 forms, and bank statements. It’ll strengthen your application and show the lender that you are willing to provide any necessary information for the loan.
7. Review Your Paperwork
Before submitting any paperwork to the lender, have your lawyer review everything. You want to make sure you stay protected before signing anything and don’t want to overlook crucial details. Proofreading your paperwork will prevent you from submitting documents that can negatively impact your application.
Pros and Cons of a Hard Money Loan
Understanding the pros and cons of a hard money loan is essential. Take each aspect into consideration before signing papers with a lender.
Pros of a Hard Money Loan:
- Faster approval process
- Approval depends on your collateral, not your credit history
- More flexible
- Less strict underwriting — a process by which the lender verifies your debt, income, assets, and property to approve you for a loan
- The opportunity to fix and flip properties
Cons of a Hard Money Loan:
- High-interest rates
- Often requires a large down payment
- Shorter term length, which means less time to repay the loan
- Riskier than traditional financing
- It may require a track record of successful house flips
Alternatives to Hard Money Loans
A hard money loan can be risky because you cannot guarantee that your property will be profitable and generate the income you intend to develop. There are other ways to obtain a loan, and here are some options:
Private Money Loan – You can reach out to family or friends for a personal money loan. Interest rates are optional based on your relationship with the lender, and you can also determine a flexible term length. It may be a bit uncomfortable, but it is an option.
Home Equity Line of Credit (HELOC) – Getting a line of credit is a good idea when you’re looking to improve your home to increase its value or to start a small business.
Traditional Bank – You can apply for a loan through your bank. Although, be ready to submit many documents and proof that you’ll be able to repay the loan. Your credit score and your debt-to-income ratio will matter in this case.
Lendee – Lendee is a money-borrowing app accessible to all types of people. You can get help for your business regardless of your credit score or collateral. The process for a loan is fast and straightforward. Anyone can apply for a loan from the comfort of their own home.
A hard money loan requires you to have collateral. If you have it with a margin for profit, you become an excellent candidate. If you do not, don’t worry because you can use other options to obtain extra funds.
Lendee is available to help all kinds of people. With minimal requirements and flexible payment plans, obtain a microloan quickly!