What Is the Hard Money Lender Process For Connecticut — 5 Steps To Know

1. Finding a Lender

• Network and Referrals: Start by asking for recommendations from fellow real estate investors, agents, or lenders in your network. There are many dedicated financial platforms and networks where you can find reputable hard money lenders.

• Online Research: Look for lenders with strong reviews and a solid online presence. Check forums, social media groups, and real estate investment networks.

• Local Focus: Hard money lenders often prefer local markets where they have expertise and can better assess property values.

2. Submitting the Loan Application

• Simplified Application: Compared to traditional loans, the hard money loan application process is usually faster and less stringent. Applications are designed to get pertinent information but don’t require extensive documentation.

• Key Information: Expect to provide details about the property, including its address, purchase price, estimated value after repairs (ARV), and your intended renovation or exit strategy. Personal financial information may also be required but is typically less crucial than property value.

3. Property Appraisal and Valuation

• Appraisal Process: A professional appraiser will assess the property’s condition, any required repairs, and its ARV. This valuation is critical as it determines how much the lender is willing to loan.

• Loan-to-Value (LTV) Ratio: Hard money lenders often use a lower LTV ratio (e.g., 60-70%) compared to conventional lenders, focusing on the property’s ARV rather than its current market value.

4. Loan Approval and Underwriting

• Flexibility in Approval: Hard money lenders prioritize the property and deal’s merit over the borrower’s creditworthiness. However, your experience in real estate and business acumen can positively influence their decision.

• Detailed Underwriting: Despite the flexibility, the underwriting process includes a thorough review of the property’s details, potential risks, and the exit strategy. This might involve examining the neighborhood, market trends, and comparable properties.

• Term Negotiation: Discuss conditions such as interest rates (often 8-15%), origination fees, repayment schedules, and any balloon payments. Lenders will offer flexible but stringent terms to ensure their investments are secure.

5. Closing the Loan

• Legal Documentation: Upon approval, both parties sign a comprehensive loan agreement, including the promissory note, deed of trust, and an assignment of rents if the property is income-generating.

• Due Diligence: Conduct a thorough due diligence process, ensuring all documents are accurate and all terms understood. A real estate attorney's help can be invaluable here.

• Funding: Once all documents are signed, the lender will release the funds. This can happen remarkably quickly—often within a few days—directly to your escrow account or specified bank account.

Additional Considerations

• Refinancing Option: Post-renovation/rehab, the borrower might refinance with a traditional lender to pay off the hard money loan. Known as "fix-and-flip" or "BRRRR" strategy (Buy, Rehab, Rent, Refinance, Repeat), this approach leverages hard money for short-term needs.

• Exit Strategy: This is crucial to secure a hard money loan. Common strategies include selling the property post-rehabilitation, refinancing into a conventional loan, or renting it out to generate income.

• Higher Costs: The trade-off for speed and flexibility typically comes with higher costs. Expect to pay more in terms of interest rates and fees, but the benefits of quick funding and less bureaucratic hassle often outweigh these costs for short-term projects.

Navigating through hard money lending can initially seem daunting, but it’s manageable with proper preparation and reputable advice.