Understanding the hard money closing process will help you prepare specific items relating to hard money loans that may be requested of you during the approval process from hard money lenders.
A lot more happens behind the scenes in order to get hard money loans closed. A good hardmoney lender will help you prepare for the closing and give you a checklist of items you will need so you are not requested to produce documents for the hardmoney lender at the last minute.
First let’s look at the parties involved in the loan closing:
- Seller (purchase transaction)
- Hard money Lenders
- Real Estate Agent(s) (purchase transaction)
- Title Company
- Escrow Company or Settlement Services Provider
Hard Money Borrower
You or the legal entity for which you have authority to convey property. If you are acting on behalf of an entity such as a limited liability company (LLC) or a corporation, be sure to prepare a resolution required for most hard money loans which grants you specific authority to act on behalf of the entity.
The individual or legal entity from which you are purchasing the property (if applicable).
Hard Money Lenders
The individual or company who manages the borrower’s loan application, processing, underwriting and provides you with a source of private investor funds for the hardmoney loan.
Real Estate Agent(s)
Licensed agent (also may be an attorney) who represents either the borrower/buyer and/or seller for purposes of sales term negotiations and contract execution (if applicable).
Title Insurance Company
Provides a preliminary title report on the subject property(ies) offered as collateral for the hardmoney lenders. This report is compiled by searching the county and public records for all information, liens, judgments, easements, etc against the property as well as the borrower and/or seller.
Escrow Company or Settlement Services Provider
A neutral 3rd party that collects and disburses the funds as directed by the private investor, oversees the final signing of all applicable deeds and loan documents and document recording with the appropriate county office. In most western states this is a separate department of the title company and the services are performed by an escrow officer. In the eastern half of the US the role of the escrow company is referred to as settlement services and performed by an attorney.
What happens before you sign loan documents?
The closing process actually starts back at the beginning of the process. The hardmoney lender, or sometimes the real estate agents orders title and escrow services and that starts the ball rolling.
The title company:
- gathers information about the borrower and seller (if applicable).
- conducts a search of county records for liens, judgments, easements etc against borrower, seller and/or property.
- creates a preliminary title report that is an offer of title insurance on the property.
The escrow/settlement services company:
- accepts deposits pursuant to purchase contracts.
- reviews organizational documents of any entities involved and determines authorized signers.
- obtains payoffs of existing liens on property.
- obtains rent rolls, leases, service contracts, security deposits, property tax information etc for proration calculations.
- coordinates 1031 Exchange process (if applicable to borrower or seller).
- prepares settlements statements in accordance with lender/investor instructions and purchase contract (if applicable) and receives loan document package from lender.
- coordinates and oversees the actual signing of the documents, or the “loan closing”. Depending on local practices and the seller’s location, the seller may close simultaneously with the hardmoney borrower or may close separately at a different time and place (if applicable).
What happens after you sign the documents?
- The hard money lenders wire the loan proceeds to the escrow/settlement services company.
- The escrow/settlement services company records the deed, mortgages, etc with the county.
- The escrow/settlement services company disburses the funds to all appropriate parties.
- The title company issues title insurance policy(ies).
So while signing closing documents from hard money lenders may seem like a quick and final process to your transaction it is actually neither. A large amount of effort goes into getting the loan transaction to the closing table. The loan transaction is complete when the security instrument (e.g. mortgage or trust deed) documents are recorded, and funds are disbursed. The closing and loan funding process varies based on time, state laws, and county processes. As a general rule, most transactions disburse funds within 3 days after loan documents are signed. If you are planning to receive funds at a particular time, coordinate closely with your hard money broker and be alert that funds will not necessarily be disbursed right after you sign your documents.