The hard money loan documents required will vary from lender to lender and also vary based on the type of the loan requested by the borrower. The type of loan can be placed into three different categories:
- Non-consumer loan
- Consumer loan
- Consumer owner-occupied (“consumer O/O”) loan
A consumer loan is defined as a loan where the proceeds are primarily used for personal, family or household purposes. The type of property that is collateral for the loan (single family residence, investment property, commercial property, land, etc.) is irrelevant to the classification of a loan as a consumer or non-consumer loan. Only the use of the loan funds matters. The amount of hard money loan documents and disclosures increases as the type of loan changes from non-consumer to consumer to consumer O/O. This is partially due to the current federal regulations that all lenders (even hard money lenders) must comply with for consumer and consumer O/O loans.
All hard money loans will require a certain number of basic disclosures and loan documents. Additional layers of documents are added for a consumer loan and even more with a consumer O/O loan. Therefore, the hard money loan requirements for a non-consumer loan are generally less, as is the required documentation. The process to apply for this type of hard money loan is much faster and requires less paperwork than a consumer hard money loan for a primary residence.
The following is a list of the basic hard money loan documents that many lenders require in all loan transactions. Some lenders may require additional documents.
Hard Money Loan Application
The first step to apply for a hard money loan is to fill out a hard money loan application. The type of application and information required on the application will vary from lender to lender. Some hard money lenders require a great deal of information while other lenders only are interested in basic property and financial information.
The application may also vary based on the type of hard money loan the borrower is requesting. If the borrower is interested in non-consumer investment property financing options the loan application may differ from the loan application for residential bridge loans or other consumer loans.
Commercial hard money loans often require more information and more extension applications than residential investment property loans.
Disclosures and Documents Provided by the Hard Money Lender
As previously stated, the hard money loan documents and disclosures will vary from lender to lender. The following are some of the most common disclosures and documents necessary for a hard money loan.
Mortgage Loan Disclosure Statement (a California Bureau of Real Estate Form) – Provides borrowers with information about the costs and fees associated with the loan as well as the terms of the loan.
Equal Credit Opportunity Act Notice – Mandatory disclosure prohibiting discrimination based on race or color, religion, national origin, sex, marital status, age, applicant’s receipt of income derived from public assistance or the applicant’s exercise, in good faith, of any right under the Consumer Credit Protection Act.
Fair Lending Notice – A result of The Housing Financial Discrimination Act of 1977, this notice states that it is illegal to discriminate based on the racial, ethnic, religious or national origin composition of a neighborhood or geographic area. It also states that it is illegal to discriminate against the borrow due to race, color, religion, sex, marital status, domestic partnership, national origin or ancestry.
Hazard Insurance Disclosure – Disclosure stating that a lender can’t require a borrower as a condition of receiving or maintaining a loan secured by real estate, to provide hazard insurance coverage against risks to the improvements on the real estate in an amount exceeding the replacement value of the property’s improvements.
Deed of Trust – Document that, when recorded, places a lien in the amount of the loan against the property that is collateral for the loan.
Note – The written promise to repay a specified amount of money at a specific interest rate, periodic payment and length of time to repay the loan.
Escrow Instructions – Written instructions signed by lender and borrower which instruct the escrow company what conditions are required before a loan escrow can close.
The following is a list of additional documents commonly required for consumer loans.
Proof of Income Documents
While different hard money lenders have different policies on verifying the borrower’s income, they are required to obtain verification of the borrower’s income when the borrower applies for a consumer hard money loan. The accepted documents may include:
- Tax returns
- Pay stubs
- Bank statements
A hard money lender may also require a bank statement for proof of funds for the down payment or holding costs the property and loan.
The lender must use this information along with the borrower’s monthly expense information to ensure the borrower’s debt to income ratio will remain below a certain level. Hard money lenders are not exempt from these government regulations.
Loan Estimate – This new document created as a result of the Dodd-Frank Act discloses to the borrower many items including the loan amount, interest rate, monthly payment, and all costs associated with the loan.
Closing Disclosure – This document is very similar and it provides the same information as the Loan Estimate along with the closing date and disbursement date.
Consumer Owner-Occupied Loans
Finally, the following additional documents will be required for consumer owner-occupied loans.
HOEPA Disclosure – If the interest rate and fees are above a certain threshold, the loan is classified as a “HOEPA” loan (from the Home Ownership Equity Protection Act) and this document discloses the APR (Annual Percentage Rate) for the loan.
Homeownership Counseling – This document discloses the requirements for obtaining a homeownership counseling certificate before the loan can be completed.
Right of Rescission – In consumer loans where the security is the borrower’s primary residence, the 3 day right of rescission must be provided to the borrower after signing the loan documents.
Oral Disclosure – Many lenders use an oral disclosure to confirm orally with the borrower that he/she understands all of the terms of the loan.
Once again, the documents discussed in this article are the ones that are most commonly used by many hard money lenders. Each specific lender will likely have additional disclosures and documents for the borrower to review and sign before completing the loan transaction.