If you hear someone talking about hard money loans, what do you start thinking about in that moment? You may assume that the hard money loans are provided by shady lenders looking to get the most from their clients by charging ridiculously high-interest rates that make it nearly impossible to pay the mortgage off on time.
In the past, some lenders would use an applicant’s home as collateral for an extremely high loan that they knew the applicant would not be able to pay off. If the borrower were unable to pay the mortgage back, the lender would attempt to have the foreclosure process started. While this is something that happened in the past, it no longer happens, but many people still think it does because they have not used the services that are provided by a hard money lender in such a long time.
If you want to find out more information on hard money loans, continue reading for further details on what these loans are, when they are most appropriate to use, and what types of requirements exist for someone who is looking to borrow some money from this type of lender.
Understanding the Purpose of the Hard Money Loan
When someone needs a loan on a short-term basis, the hard term money loan is often a good choice. It is provided to borrowers who own real estate and it allows them to receive fast cash to cover certain expenses. Funding is not provided by a traditional lender, such as a banking institution. The funding comes directly from different investors. These loans are often paid off within a year, but there are times when extensions are offered to individuals who may need additional time to pay the money back that was initially borrowed. In those instances, the client may have up to five years to pay the money back.
When taking out a hard money loan, the individual who borrows the funds will need to pay a set amount of money each month in interest. A hard money lender may provide thousands of dollars to an applicant, but the total amount that is offered to each applicant depends mostly on how much their property is worth.
One thing that most applicants tend to prefer about the hard money lenders is that they are not too concerned with the applicant’s credit score and are instead more interested in finding out about the value of the property that is being used to secure the loan in the first place. Someone who has been denied financing from a banking institution may get approved for financing with a hard money lender because they have enough valuable property to use as their collateral for the loan. Sometimes a bank is not willing to work with a person, but the hard money lender is often willing to provide the person with the loan they need.
The Types of Property You Can Own When Applying for a Hard Money Loan
It truly does not matter what type of property you own because you may still get an opportunity to receive a loan for a set amount of money. Different applicants use all kinds of properties as collateral for their loans, including their homes, spare properties, commercial properties, and more. Some lenders prefer working with borrowers who currently want to use their homes as collateral, but other lenders have experience with all types of properties.
When Is It Best to Use These Loans?
While the hard money loans come in handy at times, they are not for everyone. If someone is buying a home and they have a fantastic credit score, steady proof of income, and are not in debt, they have a good chance of getting funding from a traditional banking institution. However, when a person has been turned down by the bank or if they know they will get turned down because of their financial situation, applying for a loan with a hard money lender is the better solution.
These are a few of the different reasons why someone may choose to use one of the hard money loans:
- Renovating a home to sell it for more money
- Obtaining money for construction-related reasons
- Obtaining funds with a bad credit score
- Getting funding quickly instead of going through a lengthier process with a traditional bank
Who Can Benefit the Most From A Hard Money Loan?
Different investors have quite a few reasons to use these loans, but it usually because they can get the money much quicker than they would get the money if they were going through a traditional bank simply because the process takes longer. The funding from a hard money lender tends to take no more than seven days. However, bank funding can take more than a month, which is frustrating to some real estate investors.
Having an opportunity to receive approval shortly after completing an application and then receiving the funding in about a week is what makes people want to apply for the hard money loans over any other loans that are available. Some real estate investors are in a rush to get the money they need because they are bidding against other investors and want to win.
One of the most common reasons for someone to choose a hard money loan is that they are unable to get what they need through a conventional loan or from the banks. As most of us know, life doesn’t go the way we want sometimes. Various credit issues such as foreclosures or short sales happen sometimes.
As well as a good credit rating it’s also important to have a good income history. Even if the individual is currently earning a good income now it needs to be something the bank sees as consistent. Those in the business of lending hard money are sometimes able to look past these issues if they feel the borrower will repay the loan and if there’s enough equity in the property to cover things.
Understanding Points And Interest Rates For Hard Money Loans
The points and interest rates that hard money lenders will charge can vary one to another and even from one region to another region. A good example of this is in the state of California where rates are often lower because of the fact that the state has a lot of hard money lending firms. Competition forces these companies to compete by decreasing the rates at which they lend money.
As part of this business, these types of lenders are taking greater risks than the conventional banks do. This is a significant factor in why the interest rates on these types of loans will be higher than they are with conventional loans. In fact, it’s very common for hard money loans to have interest rates that range from 10 to 15% and the exact amount is determined by the individual lender and because of the risks they see themselves taking. It is also common for these lenders to charge points that are up to 4% of the total loan amount. As you would expect, these points and rates will vary significantly depending on several factors.
Typical Value Ratios For Hard Money Loans
The most common way a hard money lender determines the loan amount is based on a ratio calculated around the value of a property. If this loan is for the purpose of improving a property then the lender will estimate what the property value will be after the improvements have been completed. This type of loan is considered to be riskier because the individuals capital investment is decreased whereas the lender increases the amount of capital put in. Because of the increased risk, the hard money lender will naturally charge more on the interest rate.
In some cases, a money lender might be willing to lend an even higher percentage of the ARV and they may even finance the cost of rehab. Although this may initially sound fantastic to the borrower, it is a high-risk loan and the points and interest rate charged are equally high. It’s not at all uncommon to see interest rates at 15% to 18% and 5 to 6 points charged by the lender because of the risks and the fact that the borrower didn’t put up any kind of a down payment. There are some situations where the borrower is able to still make a profit despite the extremely high rate of interest and points charged.
Hard Money Loan Requirements
The lenders themselves are mostly interested in the collateral and it’s overall value as compared to the loan to make its decision. They don’t concern themselves very much with the individual’s credit rating. If a borrower has the appropriate capital to cover the loan and interest then the lender will often overlook short sales and foreclosures that are on the borrower’s record.
What the lender will consider is what type of plan the borrower has for the property. The lender wants to see that the borrower has a plan that will ultimately pay the loan off. If the borrower is planning on getting a long-term loan after the improvements have been made or if they plan on selling the property after making the improvements then this might be a suitable plan.
How To Find A Hard Money Loan Lender
Fortunately, it’s not as difficult as you might think to find a hard money lender that is reputable. The first place to start your search is on Google by simply searching the term hard money lenders. The search results will usually show some individual companies as well as a compiled list of companies that are put together by bloggers and websites. These will usually yield several lenders that a borrower can begin evaluating and contacting.
It’s also possible to go to a local real estate investor club meeting to search for these lenders. Many medium to large cities will have these kinds of meetings and they are commonly attended by those who do this kind of lending. Even if there aren’t any of these lenders at the particular meeting you go to, you can easily ask other investors there to recommend some hard money lenders to you. Conventional mortgage brokers, real estate brokers and other similar types of professionals can also recommend these type of lending institutions to you.
Now You Have The Knowledge To Confidently Go Forward
With the information contained herein, you now have enough knowledge that you should be able to find a hard money lender for your borrowing needs. Even though the high-interest rates might scare you at first, the ability to get the loan you need quickly can be of great benefit. The fact that these lenders will work with you when others will not will often outweigh the extra costs you’ll need to pay.
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