When many people hear the term “hard money loan”, otherwise known as a “private money loan”, they often think of shady lenders that charge their customers with unaffordable interest rates. Although this might have been the case in years past with predatory lenders selling risky loans to borrowers, these types of lenders no longer exist in the lending market. Some stigma does remain for real estate investors who have not had a chance to try out a service from a reputable hard moneylender. However, nowadays you can rest assured knowing that you will receive affordable loans on fair terms. Let’s take a look at the basics of taking out a hard money loan with this ultimate guide.
What is a Hard Money Loan?
A hard money loan is a type of short-term loan that is secured using real estate and is typically funded by private investors. The terms of this sort of loan usually span between 6 and 12 months, however, it can be expanded to terms of between two and five years if needed. This kind of loan requires that you make monthly payments of interest only, as well as some principal and then a lump payment once the term ends.
How Much Can You Borrow?
The amount of money that you can take out is based on the value of your property. This property can be one that you already own that you want to put up as collateral, or it can be a property that you plan on acquiring in the future. Hard money lenders usually are concerned with the value of the property instead of your credit score. However, your credit report still matters to them. For those borrowers who have a less than ideal credit score and so are unable to obtain conventional financing because of a short sale or foreclosure, you can still get a hard money loan if you have enough equity in your property that you can use as collateral. In other words, when banks say no, you can often rely on a hard money lender to say yes.
Types of Property You Can Buy
You can obtain a hard money loan on any property you desire from industrial to land to commercial to residential. Some lenders specialize in a particular type of property like residential properties and so are not willing to do land or commercial property loans because of their lack of experience in the field. The majority of hard money lenders will refuse to lend to those who have an owner-occupied residential property because of the additional regulations and rules that go along with it. However, there are some who are willing to go through the extra paperwork.
What Are Hard Money Loans Used For?
Hard money loans are not ideal for every kind of loan need. When you are buying your primary home on good credit and have not gone through a foreclosure or short sale, then you may want to consider a bank loan first. Hard money loans are best for those who require a loan in a short time frame and who are unable to obtain a traditional loan or don’t have time to wait for the long underwriting process of one. Taking out a hard money loan is also ideal for such situations as fixing and flipping a house or for construction needs.
Obtaining a Hard Money Loan for Quick Closure
People use hard money loans for a variety of reasons. One of the main reasons is that it gives them the ability to obtain funding remarkably quickly. In the majority of situations, hard money loans can be funded in a one-week period. That is much shorter than the typical 30 to 45 days that a bank loan takes to be funded. Additionally, the application process of a hard money loan typically takes less than one or two days, and in some instances, a loan may be approved on the very same day that you apply for it. This fast approval rate is a major advantage to people; especially real estate investors who want to obtain a property that has competing bids. A hard money loan allows you to close quickly and get the seller’s attention so that your proposal is set apart from the other buyers.
Obtaining a Loan for Those Rejected by Banks
Another major reason that a borrower chooses to get a hard money loan is because a traditional bank refused them service. Life is not always simple, and credit issues, foreclosures, and short sales do happen. Another component that banks look at is income history. If you recently started a new job, a traditional bank may deny your loan request because you do not have enough income history.
The Interest Rates of Hard Money Loans
The interest rates on hard money loans range from lender to lender and can also vary depending on the region you live in. For instance, a hard money loan from California typically has lower interest rates than other parts of the US, as California has many competing hard money lenders, which causes a decrease in prices. Hard moneylenders do take on more risk than traditional banks, which causes the interest rate for a loan to be higher than that of a conventional loan. You can typically expect a hard money loan interest rate to range between 10 to 15 percent.
Paperwork Needed for Hard Money Loans
Although your property’s value secures a hard money loan, there are some documents that a hard money lender will require from you. For example, they need to see that you have proof of income and other assets that you have, as well a documentation of your credit report. They may also want to see such documents as recent bank statements, proof that you have available closing funds, property financials, and operating agreement. Keep in mind that every lender’s requirements are different and so will need different documents.
Requirements of Hard Money Loans
As stated earlier, lenders of these types of loans are mostly concerned with how much equity you have in your property that can be used for collateral, which makes them less concerned about your credit rating. This often allows hard moneylenders to overlook whether or not you have enough money to repay the loan’s interest. You must also be able to show that you have a laid out plan to show how you will be able to repay the loans. Typically, this includes improving the property and then selling it or securing another long-term financing option.
Alternatives to Hard Money Loans
There are several alternatives to obtaining hard money loans besides seeking traditional methods. For instance, you may look into peer-to-peer lending as a way to fund your real estate projects through the use of crowdfunding. You may also look into obtaining a commercial loan through a bank or attempt another private money alternative. As long as you can put a portfolio together of past deals, you have a chance of getting a commercial loan. To receive private money, you can attempt to pitch your investment to private investors to see if you can obtain a loan from them.