Borrowing money from a lender gives you the opportunity to fulfill various ambitious goals. Most lenders are financial institutions that are in the business to make money from providing loans, such as banks, credit unions, hard money lenders, etc. Remember that all lenders expect to be repaid; otherwise, there can be problems. So just because someone agrees to loan you money, it doesn’t mean that it’s necessarily a good idea to borrow from them. You must have a solid plan in mind of how you will repay the amount before signing any documents.
The terms of a loan agreement state how often payments need to be made, the interest rate, the maximum amount of time within which the loan must be completely repaid, and what happens if you fail to do so. Evaluate all your options; for real estate owners, hard money loans offer short-term financing. However, it’s always best to seek advice from an expert before choosing a solution.
Consider the following before opting for hard money loans:
They tend to be expensive
While it may seem straightforward with the asset securing the loan, it is a costly option. Interest rates are usually higher (ranging from 12% to 14%), so you need to move on as quickly as possible. Everything must go according to plan for profits to materialize. But because these loans are generally easier to acquire, they are ideal for house flipping projects, rather than purchasing a home to live in.
They will look into your credit
Though good credit is not necessary to qualify for a hard loan, they will look into your credit history for any red flags. Even though the lender can sell the asset to get their money back, they need to check whether you are reliable in making payments.
They have a low loan to value ratio
The property you are buying serves as collateral. You will have to sign papers to place a lien on the property. The lender can take possession of the property and sell it if you fail to repay the amount.
And you will need to make a downpayment to qualify for the loan. You may pledge other assets or personal property to qualify. Expect loan to value ratios close to 70%. This ratio explains how much of a property you truly own compared to how much you owe. It also helps the lender evaluate the risk. The more they lend, the higher the risk, and the higher the LTV. This means:
- It’s harder to get loans approved
- There’s a higher interest rate
- There may additional costs involved, such as mortgage insurance
As long as a hard money lender knows that he’ll get his money back, you’re ready to go. After all, the prospects of a good profit – for you as well as for him- are on the table. Before you proceed, here are key characteristics to help you find a hard money lender that’s suitable for you.
Specialized in the field
When financing an investment property, you should know the terms that the hard money lender is offering. Make sure you are dealing with a company that is knowledgeable and experienced in the field. Since this is a short-term loan with the intent of buying and selling a property for a profit, the lender and the borrower need to work as a team. Not only should they be experts, but also competent and up to date with all the policies and regulations. The loan process should be transparent to make it as successful as possible.
Familiar with the local market
Select a local hard money lender. They will be more informed about the local real estate market, thereby readily providing client references and testimonials that a borrower can look into. Their experience in the field will be relevant to your investment, allowing a more accurate underwriting of your asset. The chance of default decreases because the local lender is a member of the same community as the borrower, so there is a greater interest in fostering success. They can also provide more personal attention than an out-of-state money lender.
Standard rates are more dependable
One of the main advantages of a hard money lender is that you can get a loan fairly quickly. The greater the value of the property, the more money you can get. Essentially, a hard money lending expert is interested in the potential value of the property you’re buying.
But you cannot afford to lose out on a deal because of financing issues. A lender should provide information and complete assessments to close the deal as swiftly as possible. Watch out for is unusually high-interest rates, e.g., 15-18%. Aim at finding those lenders that charge around 12% interest and 2-4 loan origination points.
Know the default rate and current loans funded
Hard money loans are funded by private lenders, so there is less red tape involved in processing the applications or financing the loan. This is beneficial for the borrower because he can acquire the loan quickly. However, it’s essential to know how many loans the lender has already funded and what the loan default rate is. Underwriting flexibility gives the hard money lender the freedom to set rates based on risks. Borrowers with more real estate experience with a proven record of completed fix-and-flips can expect to receive a lower rate than an inexperienced investor without a track record of success. But a high default rate could indicate that underwriting principles are either bad or predatory.
On the whole, hard money loan fills a particular niche- real estate development. But it’s a powerful tool for those who see the potential in a specific property. If you think this is the way to earn $, make sure you understand what you’re getting into before signing any papers. And don’t forget, have a well-thought-out exit strategy as well.