Minimal Documentation Requirements: A Big Win for Hard Money
Imagine conventional lending and hard money locked in a winner take all battle. Hard money would have a decided advantage thanks to the very characteristics that distinguish it from its conventional counterpart. One such characteristic is minimal documentation requirements. It is a big win for hard money.
Documentation for Conventional Lending
It is important to point out that hard money lending goes exclusively toward commercial projects. Hard money is not available to buy cars, pay for a college education, or remodel the house. That being said, the documentation requirements for a comparable loan in the conventional market are pretty daunting.
Conventional lenders have been known to ask for:
- Business plans.
- Profit and loss statements.
- Business financial details.
- Accounts payable and receivable information.
- Bank account records.
- Tax records.
It is not unusual for conventional lenders to pull credit reports on a borrower’s principles. The same people who will be legally responsible for the loan will have to have stellar credit.
The most frustrating thing is that documentation requests can keep coming throughout the entire underwriting process. It can seem like they never end. Right up until closing, the underwriter is asking for something else.
Documentation for Hard Money Lending
Hard money lenders are private lenders not required to follow the same underwriting rules. As such, lenders make their decisions primarily on collateral value. That allows them to complete approval and underwriting with far less documentation.
So what types of documents do hard money lenders require? Here is a typical list complements of Salt Lake City’s Actium Partners:
- Completed loan application.
- Photographs depicting the collateral.
- Purchase contract (when the loan will go for property acquisition).
- Rehab/repair cost estimates (when applicable).
- Preliminary title report (when the collateral is property).
- Proof of proper insurance.
A conventional lender will ask for all these things as well. On the other hand, a hard money lender will not need much more than this. Bear in mind that Actium’s list is a general list. Some hard money lenders might require different documents based on the purpose for a loan and who is applying for at.
Hard Money Lenders Operate Differently
Hard money lenders can get away with less documentation because they operate differently. The differences between hard money and conventional lenders start with collateral. In a hard money scenario, the collateral backs the loan deal. Collateral needs to be valuable enough to cover the entire cost of a loan plus any expenses the lender might incur in the event of default.
In a conventional lending scenario, collateral is still part of the equation. But conventional lenders do not make approval decisions based on its value. Rather, their decisions rely on borrowers proving their ability to repay. Doing so requires a lot more documentation.
Another significant difference is that hard money loans are short term loans. They typically do not have terms exceeding 24 months. An average loan runs for 6-12 months. The short-term nature makes collateral value much more important.
Meanwhile, conventional loans tend to be long term instruments. The value of the collateral is less important because its value will change over the loan’s term. This explains why conventional lenders concentrate so much on a borrower’s ability to repay.
Hard Money Wins the Day
The long and short of it is this: hard money wins the day for certain types of funding needs. Minimal documentation requirements are a big part of that. Not having to furnish so much documentation makes hard money loans more accessible to the types of borrowers for whom they are intended. That is a win in my book.