The Top 8 Things You Must Know About Hard Money Loans
Are you a real estate investor looking for financing options? In that case, hard money loans may be your best bet. This loan can be your quickest path to securing a finance deal. However, you have to understand the basics of a hard money loan in order to ensure that it is the right option for your needs.
In this article, you are going to learn about everything you must know about a hard money loan. So, without further ado, let us get started.
Hard Money Loan: An Overview
Hard money loans are short-term financing secured by real estate. The typical source of funding is private investors or a group of investors. Conventional lenders, such as banks and credit unions, do not provide hard money loans.
You can secure a hard money loan for up to 12 months. However, you can also get this type of financing for an extended time period of between 2 and 5 years. A hard money loan requires you to make monthly payments of interest only. Another option can be paying interest, some principal, and a balloon payment by the end of your loan term.
The hard money loan you can get depends on the value of the property you want to put down as collateral. This can be a property you already own or wish to acquire with the loan. Therefore, lenders will be more interested in your property’s value than your credit score.
8 Top Things You Must Know About Hard Money Loans
Here are eight important things you need to know about hard money loans to make an informed decision.
1.Types of Property for Hard Money Loans
You can secure a hard money loan for any type of property, such as single-family residential units, multi-family units, and industrial and commercial land. However, some lenders may specialize in one or more specific property types.
2.Types of Deals for Hard Money Loans
A hard money loan is not suitable for all types of real estate financing. For instance, if you are planning to buy a home that will be your residence for years to come, it is best to look for options other than hard money loans.
A hard money loan is a viable option where banks are unable to provide you with a short-term loan for real estate investment or purchases. Here are some scenarios where getting a hard money loan will be a better option:
- For construction
- For a fix and flip project
- Land loans
- You have credit issues
- When you are a real estate investor and need to act quickly
3.Who Can Use a Hard Money Loan?
Hard money loans are suitable if:
- You are looking for a quick short-term loan as you can get a hard money loan within a week or so. This can give you a competitive edge over other investors to secure a deal.
- You have been rejected a loan by a conventional bank or credit unions
To know if a hard money loan is for you, seek assistance from a professional credit advisor such as Personal Capital.
4.Points and Interest Rates for Hard Money Loans
The interest rates for hard money loans vary by the lenders and regions. For instance, a hard money lender in California will offer you a lower interest rate compared to other states. This is because of a higher number of hard money lenders in California. Therefore, it works to your advantage because lenders lure you by offering interest rates as low as possible.
Typically, you can expect to pay a 10% to 15% interest rate on a hard money loan. On the other hand, the points may range between 2% and 4% of your total loan amount. Furthermore, your points and interest rates may depend on your loan-to-value (LTV) ratio.
5.Loan to Value Ratio for Hard Money Loans
A loan a lender will be willing to lend depends upon the ratio of the amount you wish to borrow divided by the property’s value. You can lend up to 65% to 75% of your property’s current value. Some lenders may consider the after-repair value (ARV) of the subject property and offer you a higher loan amount.
However, offering ARV is a higher risk for the lender because the amount the lender puts in is higher than what you invest in the property. Therefore, in this case, the lender may charge a higher interest rate; hence you can expect to pay between 15% and 18% of interest rates and 5 to 6 points.
6. Requirements for Hard Money Loans
A hard money lender will be primarily concerned with the sum of equity you have in the property used as collateral. Your credit rating is not a big concern for the lenders. As long as you have the capital to pay the loan’s interest, the lender will be willing to overlook any short sale or foreclosure on your record.
The lender may also consider your plan for the acquired property. Therefore, you must present a viable plan showing how you intend to make timely payments. This usually involves property renovation, selling, or obtaining a long-term loan later.
7. Benefits of Hard Money Loans
Securing a hard money loan has numerous benefits, such as:
- Quick to Finance – you can secure a hard money loan in a matter of days or weeks. This gives you the competitive edge to close time-sensitive real estate deals quickly.
- Negotiability – you can negotiate better terms with a hard money lender. Private investors can be more flexible than a conventional bank.
- Collateral – You can use the property you wish to acquire as collateral. However, some lenders may also accept your existing property, assets, and retirement account as collateral.
- No Red Tapes – a hard money lender is more interested in the property for collateral than your credit score, debt-to-income, LTV, and other financial indicators. Therefore, you are less likely to face any red tape or roadblocks when getting a hard money loan.
- No Middleman – a hard money loan allows you to bypass the need for an intermediary or middleman and get a loan faster and more conveniently than conventional banks and credit unions.
8.Things to Beware Of
While hard money loans are an ideal financing option for many real estate investors, there are two things that you must be aware of when securing this type of loan.
- Higher Cost – since hard money loans represent higher risks for the lenders, they will demand points up to 10% higher than conventional lenders. Similarly, your repayments will be higher due to 10% to 15% interest rates. You can also expect other charges such as closing costs, origination fees, etc.
- Short Repayment Plan – a shorter repayment period is a price you have to pay for securing a loan so quickly and without any conventional prerequisites. Typically, a lender will offer you a hard money loan for a period of between 6 to 18 months. Therefore, you must come up with the repayment amounts as soon as possible.
Now that you know what hard money loans are and everything you must know before securing this type of finance, it is time to decide. Use the information in this article to your advantage and speak to a lender with confidence. However, you must remember that while interest rates and points may be higher, securing a loan in a short time can come with benefits overweighing the extra costs.