How Does One Get a Hard Money Loan?
While property investment is a lucrative business with a huge potential for significant profits, it often comes with high risks. According to statistics, the average profit margins shrank since the pandemic onset.
Since real estate investment requires significant funding, most people turn to lenders for a financial boost. However, not everyone qualifies for traditional mortgages. And even when you qualify, the turnaround time may not be appropriate.
For most property investors, hard money funding is a great option when you need the money quickly. They are more flexible, and you can get the money within days. And since it works differently from traditional loans, it’s important to understand how to get a hard money loan.
What Is a Hard Money Loan?
Hard money loans are a unique type of financing where borrowers use property collateral to secure the loan. Ideally, conventional banks don’t issue hard money. Instead, the lenders are private companies or individuals.
Since the loan uses the property in question as collateral, people with subpar credit scores can have an easier time getting hard money financing. Additionally, most lenders have fewer requirements compared to conventional lenders.
This means the turnaround time is shorter, making the cash loans appropriate when you need the money quickly.
While hard money lenders often conduct an inquiry into your creditworthiness, it’s not a major underwriting factor. This aspect is often attractive to people with limited access to traditional loans. However, it means the hard money loan lender is taking more risks meaning they have to charge higher loan fees and interests.
Prepare the Down Payment
Depending on the property investment and your profile, some hard money providers may not ask for a down payment. Often, flippers are required to pay between 20%-30% in down payment to qualify for hard money financing.
However, there are some circumstances when a hard money lender can issue 100% of the loan without any down payment. This option is only available to people with perfect credit scores and significant experience in property investment.
Boost Your Financial Strength
Hard money providers require that lenders have enough cash reserves to cater for loan payments and holding costs. Most of the time, holding costs may include property taxes, insurance, and HOA payments.
When you have higher cash reserves, lenders are more likely to offer you higher loan amounts. In case you don’t have the necessary cash reserves, you might have some difficulties getting good hard money funding.
Nevertheless, some lenders may be willing to offer higher loan amounts and hold a percentage of the funds to cover the holding costs, taxes, and other loan expenses. With this arrangement, you still get your loan, but there are enough reserves to cater to the loan costs.
Property Investment Experience
Experience in property investment is important since the market can be volatile. Therefore, lenders want to know whether you have credible experience in real estate. Unlike individuals with good real estate experience, newbies trying to get funds for their first property investment might have fewer hard money funding options.
Typically, lenders want to know about the project’s details, including the exact exit strategy of the investment. Also, they may ask for details about your loan repayment plans.
Repayment Strategy
Hard money loans are meant for short-term investments with an average term of one year. Therefore, it’s important to have a clear exit strategy from the start.
Ideally, you should plan to sell off the property before the loan period expires. Most hard money options are for the fix and flip projects, and investors make a profit on completion.
But if it’s not possible to sell the property, you might need to find traditional funding to cater to the costs.
Vetting Private Lenders Before You Apply
The best strategy to assess private money lenders is by talking to other property investors. Ideally, you should look into the overall charges, turnaround time, and responsiveness of a lender.
When you don’t do your due diligence, you may not get the exact amount a lender had agreed to offer, and you can also lose your down payment. Most importantly, you need to double-check the contract terms to ensure you are comfortable with all the details in the fine print. At the very least, look at several references and try to find out their experience with a specific lender.
Conclusion
Hard money funds are excellent options when you need quick funds or don’t qualify for conventional loans. And while the hard money loan rates and costs may be higher than traditional loans, it reflects the higher risk involved with these loans.
Even when you don’t meet the basic requirements, it’s possible to strike a deal with a lender since they tend to be more flexible.
However, it’s essential to understand how the loans work before you dive in. When you’re aware of the unconventional lending landscape, it becomes easier to find the best option that suits your circumstances.
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