Hard money loans are the go-to option for real estate investors looking for fast and reliable loans to secure great deals in the market. Private money lenders give these loans to real estate investors who want to purchase low-cost properties.
The investors going for these loans may want to purchase an investment property, a commercial property, or a residential property. With the latter, the investor will renovate or remodel the property before selling it at a profit. This is called house flipping and typically involves some risk, as the investor needs to sell the property in the shortest time possible.
How Hard Money Loan Works
Hard money loans are a quick financing option that takes weeks or even days to process. They come with fewer requirements than traditional bank loans. For instance, the borrower doesn’t need a good credit score or an impressive business plan. There’s also no lengthy underwriting process, as the lender is the sole decision-maker.
With hard money loans, the asset to be purchased is also used as the collateral for the loan. This reduces the risk for both the lender and the borrower. However, these loans come with a shorter repayment period, slightly higher interest rates, and additional costs, e.g., closing fees.
The hard money loan rates vary from one lender to another. Most lenders set their interest range between 7% and 14%, depending on the risk they have taken. These rates are paid monthly, in addition to one lump sum payment at the end of the loan period.
What are the Requirements?
While hard money loans are fast, convenient, and flexible, they still come with some requirements. Most of these requirements aren’t rigid. So they can be negotiated, depending on the deal you are bringing to the table. That said, here are the three main factors your hard money lender will use to approve or disapprove your loan application.
Your Equity or Down Payment
A private lender will consider your request for a loan if you can raise the required equity before taking the loan. For most residential properties, the down payment ranges from 25% to 30%. Commercial properties often have a higher down payment in the range of 30% to 40%.
Your Overall Financial Strength
Most private lenders won’t look at your credit score and your past loans. However, many will still consider your overall financial strength. Some of the factors that determine your overall financial strength include your cash reserves and prove of a steady income. This is necessary to ascertain that you can comfortably make monthly loan payments and any holding costs. The latter include insurance, taxes, and homeowners association (HOA) payments.
Your Experience in the Real Estate Market
Hard money lenders want to ensure they only fund people who have a strategy for using the loan and repaying it. So, they will first prioritize those with a proven track record in the real estate market. A first-time borrower may be out of luck if their preferred lender chooses to work only with seasoned real estate investors.
The private money lender will often ask for the project’s details, the investor’s exit strategy, and their contingency plan. This is enough to convince the lender that the borrower either had or lacks a solid plan for repaying the loan.
Finding the Right Private Money Lender
Now that you know what your hard money lender will use to approve your loan application let’s see how you will choose the right lender to work with. More often, the best hard money lenders are the seasoned players who have been in the market for long. They will usually have lower interest rates but with somewhat stricter rules. Many will choose to work with real estate investors within their locality or those they know personally.
Even so, here are some tips that will help you pick the right hard money lender.
- Ask around – join some local real estate investor groups in your locality and ask if they know of a reputed hard money lender. Chances are, you’ll be told of many private lenders. So, next is to choose the best of the best.
- Check reviews – Go to the lenders’ social media pages and website and check what past or current clients say. You can also visit some trusted online review sites.
- Get in touch – After reviewing all the options, you’ll probably narrow down to the best two or three options. What follows is to get in touch with all of them, one by one. Ask questions about their services, how they approve borrowers, their terms, fees, etc. You don’t want to be in a rush. By the time you contact the last prospective lender, you’ll have known who is better and who’s best.
Final Takeaway
Hard money loans are a useful investment tool that gives you the much-needed convenience to access the funds you need. The high-interest rates and shorter repayment periods make these loans ideal for real estate investors with a clear strategy for repaying the loan. Knowing what the lenders look for in borrowers will also help you prepare in advance to easily and quickly acquire your next hard money loan.
