Most lenders base their decision to extend a loan primarily on your income, credit score and other related factors. California hard money lenders, on the other hand, offer loans secured by collateral. With a hard money loan, you can get the financing you need even if you do not have a high credit score or the other characteristics required to qualify for a traditional loan.
Even though a hard money loan does not have the same requirements as a more traditional loan, you must still submit a variety of documents before your loan will be approved. Below is some basic information about hard money loans, along with a discussion of the documents you will need when you apply for a hard money loan.
Benefits of Hard Money Loans
Hard money loans offer several benefits over traditional sources of financing. Some of the primary benefits of getting a loan from hard money lenders in California include:
Different Types of Hard Money Loans
Not all hard money loans are the same. The type of hard money loan you apply for will ultimately determine which documents you need to submit. Most hard money loans can be classified as one of two types: Consumer loans or non-consumer loans.
A consumer loan is a loan in which the funds will be used for household, family or personal purposes. A non-consumer loan is a loan in which the funds are used for a purpose that does not fall into one of these categories. Keep in mind that the classification of the loan is based solely on the use of the funds. The type of property you use to secure the loan has no effect on its classification.
The documentation requirements are least cumbersome for non-consumer loans. Consumer loans will require a greater amount of documentation. If you are seeking a consumer owner-occupied loan, the documentation requirements will increase even more. These differences in documentation are related to the federal regulations that apply to all consumer loans, even those offered by California hard money lenders. Because of these differences, obtaining a non-consumer hard money loan is typically much easier and faster that obtaining a consumer loan, especially when you plan to occupy the property used as collateral.
Documentation Requirements for Both Consumer and Non-Consumer Loans
Below are the documents and disclosures that must be completed and filed regardless of whether you are seeking a consumer loan or a non-consumer loan.
In the majority of cases, the first document you will need to submit to obtain a hard money loan is the initial application. This application may ask you to supply information about your loan’s purpose, the collateral, your income and more. The level of detail required on a hard money loan application can vary considerably by lender. The specifics of your loan may also determine the level of detail required on this first piece of paperwork.
Hard money lenders typically provide you with a document that explains how they will use the personal and financial information you have supplied.
3. Equal Credit Opportunity Act Notice
Under federal law, lenders are not allowed to discriminate against borrowers based on certain characteristics, including age, marital status, sex, religion, race and more. Lenders must provide a notice of these requirements to borrowers under the Consumer Credit Protection Act.
4. Mortgage Loan Disclosure Statement
The Mortgage Loan Disclosure Statement provides you with specific information about the terms of the loan you are seeking, as well as the costs and fees you will pay to obtain it.
5. Fair Lending Notice
Similar to the Equal Credit Opportunity Act Notice, the Fair Lending Notice is a disclosure required by federal law that states the lender’s obligation to avoid certain discriminatory practices.
6. Hazard Insurance Disclosure
The Hazard Insurance Disclosure describes your rights and responsibilities with regard to maintaining insurance coverage on the real estate that secures your loan.
7. Deed of Trust
The deed of trust is a document that is designed to bring in a third party to ensure that both you and the lender uphold your responsibilities as determined by the loan agreement. This document will designate the identity of this third party, who will be responsible for holding the property deed until the terms of the loan have been fulfilled. After you have paid the loan in full, this trustee will relinquish the property deed to you.
8. Escrow Instructions
The escrow instructions are detailed, written requirements imposed on the escrow company. This document describes each of the conditions that must be met before the loan escrow can be officially closed.
9. Promissory Note
The promissory note is one of the most important documents that must be completed during this process. When you sign this document, you are promising to make specific loan payments on specific dates until the loan is paid in full. The promissory note will also list rules the trustee must follow in order to ensure all parts of this agreement are satisfied.
Additional Documents Required for Consumer Loans
As mentioned above, consumer loans require more extensive documentation than non-consumer loans. If you are applying for a consumer hard money loan, some of the additional documents you may need to submit to the lender before your loan can be approved include:
1. Documents to prove your income
In many cases, you will need to provide substantial proof of your income before you can qualify for a consumer hard money loan. The purpose of these documents is to provide the lender with reassurance that you will be able to make the required payments. Some of the proof of income documents California hard money lenders may accept includebank statements, pay stubs, tax returns and W2s. In most cases, these documents will need to be recent. You may also need to provide more than one of each document requested. For example, the lender may ask for tax returns from the past two years or pay stubs from several recent pay periods.
2. Documents to prove assets
If you are making a downpayment, or if the lender has a requirement related to financial reserves, you may need to provide documents that prove you are in possession of sufficient liquid assets. For most borrowers, this will simply involve submitting copies of your most recent bank statements.
3. Documents related to debts
Many hard money lenders considering an application for a consumer loan will ask for documentation related to your other revolving debts and expenses. The purpose of this documentation is to allow the lender to verify that you will be able to make the required loan payments without raising your debt-to-income ratio above a certain level. Most lenders will simply use the information contained on your credit report. However, if any of this information is inaccurate, or if you will be repaying debts listed on your credit report prior to closing in order to qualify, you may need to provide additional documentation.
4. Loan estimate
Under the Dodd-Frank Act, lenders of consumer loans are now required to prepare a loan estimate for borrowers. This document will give you specific information about all the costs associated with your loan, including your monthly payment, interest rates and more.
5. Closing disclosure
The closing disclosure is similar to the Loan Estimate. However, this document includes other information about the loan, such as its disbursement date and the date of closing.
Consumer Owner-Occupied Loan Requirements
If you are applying for a consumer owner-occupied loan, even more documents will be required in addition to the ones listed above. Some of these documents may include:
1. Oral Disclosure
After going over all of the terms of the loan, many hard money lenders require borrowers to complete an oral disclosure confirming that they understand all of the loan’s terms and their responsibilities.
2. Right of Rescission
With a consumer owner-occupied loan, the loan in question is likely going to be secured by your primary residence. This means that the lender is required to provide you with a three-day Right of Rescission by law. During this time, you have the right to cancel the loan. The Right of Rescission period begins after you have signed the loan documents.
3. Homeownership Counseling
Before the loan can be completed, a homeownership counseling certificate must be obtained. This document discloses the requirements related to this certificate.
4. HOEPA Disclosure
The Home Ownership Equity Protection Act requires California hard money lenders to include a HOEPA Disclosure if the fees and interest rate associated with the loan are above a specific threshold. This document will disclose the loans Annual Percentage Rate, or APR.