Finding the best hard money lenders – a guide on hard money loans
One similarity among real estate investors is that all of them are always hunting for the best investments. During this search, property financing is one of the challenges faced by both real estate beginners and professionals. Even before purchasing a real estate property, it is first important to find out how you are going to finance the investment. Although it will be much easier for you to have good money at hand, this is rarely the case with most real estate investors. To cover the expenses that come with purchasing new investments, real estate investors request for loans. Hard money loans can be handy when purchasing real estate property. But before requesting for a hard money loan, it is first important to investigate the loan to find out if it is the best option for your investments.
Hard money loans are short-term loans where borrowers are required to issue a real estate property as collateral for the loan. Since the loans are mostly offered by private investors compared lending institutions, they are mostly referred to as private money loans. When issuing the loan, most hard money lenders put more consideration on the property value rather than the borrower’s financial history or credit rating.
How much can you borrow?
The maximum loan amount for a hard money loan is normally determined by the borrower’s loan to value ratio. This is calculated as the loan amount divided by the property value of the item issued as collateral. As much as the loans have a faster approval rate and are easier to obtain, hard money lenders will still require borrowers to go through some documentation process. However, this process is not as demanding as those involved in traditional lending institutions.
Hard money loans, (also referred to as bridge loans) are mainly used by real estate investors who require urgent financing to cater for fix and flip projects. The loan term varies from a few months to several years depending on the lender and the amount borrowed. Borrower can make monthly repayments inform of interest and principal or interest only repayments. Terms and conditions also vary from one lender to another, but it mostly depends on the property type and the investors experience in dealing with such property.
When to consider a hard money loan
There are a number of situations that will make an investor request for a hard money loan. Some of the reasons for taking out a hard money loan include;
- Short-term financing
- Turnaround situations
- Borrowers with poor credit
In most cases, investors with poor credit history who need urgent property financing may not be eligible for loans in conventional institutions. However, hard money lenders do not focus much on the credit worthiness of the investor. This makes hard money loans the best alternative for such borrowers, provided they have equity in the property they want to invest in.
Types of hard money lenders
There are different degrees of private money lenders available. These include;
- Primary circle- Consisting of friends and family
- Secondary circle- These are mostly colleagues and other real estate investors who issue hard money loans as an alternative source of profits.
- Third party circle- These are hard money lenders who offer loans to a real estate investor. Private lenders are available both online and in-store.
What hard money lenders consider before approving your loan
Although hard money lenders have varied interest rates and terms and conditions of the loan, there are some of the key aspects that most of them will consider before approving your loan. These include;
- Deliverability of the loan
- Borrower’s strength
- Risk of loss, which is usually based on the loan amount of the value of the property to be financed
- How the borrower plans to repay the loan
- The borrower’s business plan
After this, the lender will then consider the property itself. In most cases, hard money lenders do not look at the borrowers’ credit scores. However, they have to keenly consider the asset to be financed before having your loan approved. Some of the key factors that lenders look for in a real estate investment property include;
- The value of the property when issuing out the loan
- Whether the property requires renovations, and how much will it worth after the improvements?
- In case the borrower defaults, would it be easy foreclosing the property?
How much money is involved?
The amount of money that hard money lenders can offer mostly depends on the value of the property. The property can be one that the borrower wants to finance, or what he or she already owns and wants to issue as collateral for the loan. Most lenders will give you a loan of between 60-75% the value of your property.
Reasons why your loan request form may be rejected
When requesting for a hard money loan, there may be the possibility of lenders turning down your request. Some of the reasons why hard money lenders may not approve your loan are;
- If you do not have enough equity in the existing property
- If you may not be able to make monthly payments
- If you do not have an exit strategy
Pitfalls to avoid when working with hard money lenders
When looking for a hard money loan, it is always a prudent idea to know the type of people you are dealing with. As much as you would want to work with a lender with affordable rates and flexible repayment terms, it is equally important to know the cons involved. One of the common pitfalls to watch out for are hard money lenders who change the terms of the loan when it is already too late for you to step back. Some lenders also have a bad reputation of competing with borrowers. This, they do by making backup offers to buy the property that the borrower wants to issue as collateral. In this case, the lenders tend to benefit when the borrower is unable to adhere to the loan agreement.
What borrowers need to know is that such practices are unethical. You therefore should be aware when working with hard money lenders. However, you should also bear in mind that not all fruits in a tree are rotten because there are only one or two rotten ones. All you need to do is take time and ensure that you find a reputable lender to work with.
Why use a hard money loan?
The following are some of the instances that can make hard money loans the best option for investors
- If you have an investment deal to close within a limited period and do not have time to go through the lengthy paperwork processes involved in lending institutions. With private money lenders, it can take as little as two weeks for your hard money loan to be approved. Some lenders can even approve the loan as soon as five days after your loan request form is accepted.
- If you do not have an attractive credit score or your income history is not enough to qualify you for a loan in banks.
- If you do not have enough cash to finance your investments and cannot access financing from friends and family
- If you want to quickly purchase fix and flip property. Compared to conventional lenders, private lenders will work with you to ensure that you get the best loan to finance your investments.
How do hard money loan work?
Just like applying for a loan in a bank, hard money loan application also involves the underwriting process. However, this process is much quicker. Since the lender will be more interested in the value of your property, it also does not take too much time for your loan to be approved. In fact, most hard money loan lenders will have your loan approved within a few days. The hard money loan application involves two stages;
- Pre- qualification
This process only takes a few minutes. It gives the borrower a clear understanding of the type of loan they want to request for and if it is the best option for their investments.
The process can last for 1-2 weeks depending on the lender. Based on the information issued by the borrower, the lender will come up with the loan terms, the maximum amount to be issued and the repayment plan. Hard money loans are usually approved during this process.
Why you should consider requesting for a lard money loan
One of the benefits that come with hard money loans is the faster approval rate. Provided you have met all the loan requirements, submitted the necessary documents and have equity in the property issued as collateral, you can easily access a hard money loan from private lenders. Hard money loans also come with flexible repayment terms. Moreover, borrowers with bad credit are eligible to request for a hard money loan. Lenders offer the opportunity for borrowers to come up with a repayment plan that they are more comfortable with. Compared to requesting for a loan in conventions institutions, there are less requirements involved in hard money loans. Private loans also do not attract prepayment penalties meaning that you are able to pay off your loan before the due date.
Important considerations before taking out a hard money loan
Hard money loan application does not require full documentation. Lenders with poor credit score can also apply for the loan and this puts lenders in a high-risk situation. This leads to increase in interest rates. Most lenders issue an 8-10% interest on the loan compared to conventional mortgages that only incur a 4-5% rate. It is also important to note that hard money loans are short-term loans. Most lenders issue a loan term of between 1-3 years. However, the longer the loan term the more amount you will incur on interest. If you do not repay the loan on time, you may risk losing your property.
Hard money loans can be the best option and especially for investors with bad credit. The fast approval, less requirements and flexible repayment terms makes it a perfect choice for investors. By filling out a loan request form for a hard money loan, you can easily convert your real estate property into a profitable investment.