You’re in a competitive market and you want to make a strong offer.
You’re tired of being beat out by these cash investors.
It’s understandable… but what can you do?
Some buyers have looking into hard money loans, as an option to avoid pitfalls in financing, like appraisals and financing contingencies.
While a hard money loan is an excellent way to win an offer and close on a home smoothly, it’s not without it’s hurdles.
Hard Money Loans ARE Loans
While a hard money loan is as good as cash, it is still a loan. This means that many of the finance contingencies that we have covered in Section 2 of the Purchase Contract still apply, unless removed.
2.a Prequalification form
The contract currently states that a buyer must provide, with the offer, an AAR prequalification form. This form may be supplied by most lenders, however a Hard Money Lender may not have one on hand. Your agent may be able to help you complete this form yourself, or help your lender do so, in order to be compliant.
If the AAR prequalification form does not apply, a letter from the lender, guaranteeing funds may also suffice. This would be a “Source of Funds” letter or otherwise known as “Proof of Funds”.
2.b Loan Contingency
The buyer must be able to provide evidence that their loan, or funding is approved without any “Prior to Docs Conditions”, as described in the Loan Status Update (LSU Form), 3 days prior to the scheduled close of escrow. This means, the buyer still has a chance of not being approved for the loan and can walk with a loan denial. Something cash buyers are not contingent on.
2.c Unfulfilled Loan Contingency
If the buyer is unable to qualify for the Hard Money Loan, or in most cases… if the HOUSE itself doesn’t meet the investors qualifications, they may deny the loan and thus the buyer, and the seller looses out on the sale.
2.d Interest Rates and Funds
Just like with any other financed offer, the buyer may not cancel because they do not agree with the terms or costs of the loan. These conditions should be worked out up front to ensure that the buyer will fully qualify based on the interest and terms required by the Hard Money Lender
2.e Loan Status Update
Just like with any other loan, as described in 2.b, the buyer shall provide an AAR Loan Status Update (LSU), with lines 1-40 completed, by day 10 of acceptance. If the Hard Money Lender does not have this form, your agent may assist in providing it to you or the lender to ensure compliance with the terms of the contact.
2.f Loan Application
The borrower of the Hard Money Loan must complete all necessary application paperwork for the lender within 3 days of acceptance. This may also include requirements of photos or comparative homes to the lender, in the case of a hard money loan.
2.g Loan Processing
The buyer must work diligently to ensure all paperwork requested by the lender is turned in, timely, and the lender must provide the buyer with a good faith estimate for all costs and totals. If they buyer has any objections, they should cancel prior to their due diligence expiration.
2.h Type of Financing
Our Purchase contract does not have a Hard Money Loan listed on this line, and it may create confusion in some cases. The type of loan should be written in the space, for full disclosure and clarity.
2.i Loan costs
These costs are paid by the buyer, the same as any other loan, except these may be a bit higher, as a hard money loan is a higher risk loan.
2.j Seller concessions
If the buyer wishes to have the seller participate in any of the closing costs to the buyer, that should be listed in this section.
2.k Changes
If you make any changes to the type of financing, you may be responsible for getting the sellers permission to make those changes, if it affects the buyers ability to qualify, changes the close date, or affects the seller adversely. Be sure to discuss with a knowledgeable agent about what might qualify for seller approval or not before you decide to make changes to your lending.
2.l Appraisal Contingency
Most buyers are willing to go the hard money route to avoid 2 things… the finance contingency and the Appraisal contingency. If you’re trying to ensure a strong offer, “Good as Cash”, it might be wise to use the Additional Clause Addendum to waive the appraisal contingency, as a hard money lender is less likely to require one.
TIP: Be sure to verify that with your Hard Money Lender prior to waiving the condition.
2.m Appraisal Cost
The up front appraisal cost is typically paid for by the buyer in any transaction. In the case of a hard money loan, as this is rarely required, this section can be removed, ignored or selected for buyer, just in case.
Buyers go the route of a Hard Money loan for one of 2 reasons.
- They want to be as competitive as possible, offering a “Good as Cash” offer… You should speak to your agent if this is the situation, to ensure that the offer is written correctly, and your Hard Money Lender is also aware of the situation, to ensure that no lending hiccups will prevent you from qualifying, the condition of the home won’t be an issue, an appraisal will not be needed and that any waivers needed are put in place.
- The home will not qualify for traditional financing. In these cases, you want to make sure that you do a thorough investigation into the home, and work closely with a qualified agent and Hard Money Lender to ensure your offer is strong, strategic, and no unexpected hurdles will get in the way. Keep in mind that a Hard Money Lender is investing in your ability to make the repairs and either sell the home or refinance to pay back their loan, in a typically short amount of time, so if the home is in a condition outside of your scope, they may disapprove the loan completely.
Whether you’re obtaining traditional financing or a Hard Money Loan, you should consult with an experienced agent prior to writing an offer to ensure protection of your hard earned funds.