You may have heard about hard money lenders. They are the ones who provide a hard money loan, which is a short-term loan using real estate as collateral. Unlike traditional lenders like credit unions and banks, this type of loan is funded and handled by private investors.
A hard money loan is about 12 months, but it can be extended up to 5 years depending on financial needs of the client and the approval of the lender. With this loan, the borrower is required to pay only the interest or some of the principal amount. At the end of the term, the borrower has to pay the balloon payment.
Hard money lenders are different from bank lenders since they are quick to approve and require few requirements. Also known as asset-based lenders, they are not so strict when it comes to loan applications and approval as long as the borrower has collateral. Whereas, in banks, it is very important for a person to have collateral and a good credit score.
Hard money lenders and banks will take the property in case of default but hard money lenders are more willing to foreclose the property if needed compared to banks. Hard money lenders are more concerned with the value of the property over the credit score of the borrower.
Hard money loans have their advantages which include the following:
As with any other loans, it has its share of disadvantages:
Dealing with shady operators can be a problem as you may have trouble paying back the loan with your property, ending up in foreclosure finally.
Hard money lenders can accept almost any kind of investment property, from residential units to commercial lots. However, lenders may vary when it comes to the property that they may choose to take. There are hard lenders that specialize in a certain type of property. For instance, some lenders may only want residential property while others want commercial properties. So, when applying for a loan, it is very important that you ask them about the type of loan they are able to give.
This type of loan should not be a long-term solution. But there are specific situations where you are really in need of a loan. When should you get a hard money loan? If you are in need of a land or construction loan, you can get hard money loan.
Getting a hard money loan is not as difficult compared to having a loan from a bank. Then again, with many shady lenders out there, your best bet is to secure a loan from a reputable lender or a first-source referral.
When you get a loan from a reliable hard money lender, it is much easier for you to focus on important things that you need to know. The lender should ask about your property and its price. They should also ask whether the loan is for refinancing a current loan or for property acquisition.
In the earlier discussion, hard money lenders are primarily concerned with the property value of the collateral. They are not too concerned with the credit rating of the borrower. If a borrower has a record, for instance, a short sale or even a foreclosure, some hard moneylenders may overlook these records if the borrower has a property with a high value that can be used as collateral for the loan.
However, it does not mean that lenders will just approve the loan right away. The borrower also has to show a plan as to how they intend to use the loan and whether they can pay it back.
The documents that you have to submit are the typical loan documents like a Note and Deed of Trust. Requirements may vary as some may be required to have a personal guarantee and even financial statements like proof of income or past tax returns.
You also have to write a Letter of Intent (LOI). In this letter, you state your interest in acquiring a loan. It puts the loan application in writing and it is also very useful in avoiding miscommunication.
Since the property is used as collateral, the lender will need the title insurance. It protects someone who has bought the property against another party from making any claim that challenges the property’s ownership. In the same way, as this insurance protects the borrowers, the lender also needs the same protection.
Compared to traditional loans, the interest rates are higher with hard money loans. They range from 7.5% to 12%. On top of that, you also have to pay origination fees. The amount depends on the points or the number of brokers in the transaction.
There are also cases where some lenders require deposits. This will depend on the criteria. The amount of deposit varies from $1,000 to $10,000. For single-famly homes, deposits are not required for getting a hard money loan.
Apart from asking information and specific details pertaining to the cost and other fees, it is also essential that you know the terms and conditions.
A typical hard money loan has a term for about 6 months to 3 years. Some loans have 3-year term. Single-family home renovations are between 6 to 12 months. But a commercial property will take 2 years to renovate.
Before you decide to take out a hard money loan, make sure that you take the time to read the terms and conditions of the loan. This is to make sure that you can pay back the loan. It also stipulates what is expected of you as a borrower.
If you are not able to pay back the loan, the property will be foreclosed. Since it is used as s collateral, the lender will use this to pay off the loan. But this is the last resort since lenders will always take the necessary steps to prevent foreclosure. You may be given the chance to re-negotiate the terms and duration of the loan. But if you really cannot pay back the loan, the last resort is the Notice of Default.
As with any loan, there are risks involved for the lender and borrower. In getting a hard money loan, you also have to shoulder some risks. For instance, if the lender doesn’t perform, then there is already a risk of lost time. If a deposit is required and the lender does not give the loan, you are at risk of losing your deposit. Other risks involved include market risk and implantation risk. There is also the risk of having a deal with a shady lender.
To avoid disappointment, you need to ascertain that the lender is highly reputable. Confirm if the lender has a valid license in particular real estate broker license. You may also check the Better Business Bureau.
At the end of the day, a loan will still be a loan. They may vary when it comes to loan application requirements, processes, rates, terms, and conditions. They should not be considered as long-term financial solutions. As the borrower, you should be prudent and wise enough to assess the financial situation to see whether you can pay back the loan.
Hard money lending may appear to be a viable option. Yet, in case of a default, you may lose a valuable investment property.