Are you in the real estate business or want to venture into the industry but can’t access conventional loans?
If so, you’ve most likely considered getting a hard money loan. But, do you understand the basics of a hard money loan?
If not, you must, as things can get complicated fast with these loans. Luckily, this article has you covered.
Here are things to consider before opting for a hard money lender.
1. Type of Project
You can get a hard money loan for various reasons. These loans mainly finance commercial and residential property purchases. Others finance renovation projects depending on their economic viability.
But, it’s important to note that lenders are not willing to back all projects. You’ll need to do some research to find out whether they’re ready to finance your chosen project.
2. Associated Costs
Contrary to popular opinion, hard money loans are not suitable for all individuals. Sure, they’re easier to access than bank loans or mortgages as lenders are less strict.
However, they also carry high-interest rates since their lenders assume high risks. Hard money rates typically range from 7.5 percent to 15 percent, depending on the risk of your lender.
3. Down Payment Requirement
These types of lenders don’t need your earning history to issue loans. Instead, the asset you want to buy will be your lender’s only security.
Hard money lenders require clients to offer up part of the asset’s cost as a down payment to reduce their risk. This means that they’ll not fully finance your project.
Most of them only finance 50% to 70% of an asset’s cost. So, you’ll need alternative sources of financing before approaching a hard money lender. Otherwise, they’ll most likely decline your loan application.
4. Approval Time
Hard money loans are fast and not as strict as other loans. A private lender doesn’t need you to fill out application forms detailing your income. These reasons are responsible for their growing popularity among real estate investors.
Though these lenders are fast, remember that they’re not all the same. Approach several of them, asking how long they’ll take to finance your project. Choose the lender with the shortest approval period if you’re in a time crunch.
5. Your Asset’s Worth
Different hard money lenders have varying resources and risk appetites. So, not all may be willing to finance your property if it’s too expensive.
It’s even harder to access large loans if you’re not an experienced investor or flipper. Schedule meetings with various lenders to understand how much they’re willing to finance.
6. Defaulting Penalties
Unlike bank loans and mortgages, hard money loans are short-term. So, it’s easier to default on these loans than on other types.
Your lender will assume ownership of your asset or liquidate it if you do. Ensure you’re willing to take this risk before borrowing money from these lenders.
7. Repayment Schedule
Most lenders will expect you to make monthly interest payments on your loan. Then you’ll need to make a balloon payment at the end of the agreed-upon loan period.
Hard money lenders are strict on this mode of repayment. Ensure you’re ready to make this commitment before approaching any hard money lender.
Is a Hard Money Lender Right for You?
Getting financing from a hard money lender is fast, easy, and convenient. But, like conventional lenders, hard money lenders have their rules. Before borrowing money from them, make sure you understand the rules.
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