Over the years, hard money loans have become increasingly popular thanks to the flexible loan terms and fast processing rates. Similarly, private money lenders offering these loans do not look at the borrowers’ credit history, which is a huge plus for those with a poor credit score.
If you consider taking a hard money loan, there are a couple of things you’ll need to know. In the subsequent sections, we’ve covered what hard money loans are, the loan requirements, how to find the best lenders and everything in between.
What Are Hard Money Loans?
A hard money loan is a short-term loan popular among real estate investors. The loan is taken from private lenders who charge a slightly higher interest rate than the traditional banks. Most investors who go for hard money loans either need a huge amount of cash fast or don’t qualify for bank loans.
These loans usually have a short repayment period of about 12 to 18 months but can be extended to three years in some instances. Since the loan is mainly used in real estate, the asset to be purchased is used as collateral.
How to Qualify for Hard Money Loans
The terms for getting a hard money loan usually vary from one lender to another. And since the loan comes from a private individual or company, it provides room for negotiation. However, you should meet some general expectations to qualify for the loan. We’ve rounded up the three most common requirements below.
This is perhaps the most important requirement every private lender will expect from a borrower. Having the required down payment is often an indication that you are committed to the deal and are ready to buy the property. The typical down payment is usually in the 25% to 40% range, depending on the type and value of the property. A high down payment reduces the risk the private lender is exposed to, which could mean an increased chance of getting the loan or paying slightly lower interest rates.
Familiarity with Real Estate and Exit Strategy
Most hard money lenders like researching more about their client’s experience in the real estate market. A borrower trying to step into the market for the first time will have a harder time securing the loan than a veteran investor. The real estate market can be volatile, so it is important to carefully consider the risks before taking out a Loan Against Property. So it would make a lot more sense to first understand the market before trying out a hard money loan. Similarly, the private money lender expects the borrower to have a solid exit strategy and contingency plan for repaying the loan if the property delays in the market.
Overall Financial Strength
Every lender would want to have their money back after the repayment term elapses. However, the market is always subject to several forces, and it’s not guaranteed whether the investor will honor the loan terms. So to shield themselves from adverse risks, most investors will choose to work with established borrowers with other income sources. Some of the best investment ideas in India for money lenders include peer-to-peer lending platforms, microfinance institutions, and non-banking financial companies (NBFCs).
How to Find the Best Hard Money Loan Lenders
Now that you have decided to go for a hard money loan, it’s time to find the right lender. The key here is to do thorough research and talk to other real estate investors. Spending a good amount of time to find a good lender is rewarding for both your current and future projects. Here are some tips you should follow to find the best hard money lender.
- Start your research online. Use google and other social media platforms to find lenders in your area. You can identify legit and trustworthy lenders you can consider working with from online reviews and testimonials.
- Join a community of real estate investors. Here you will interact with people who have interacted with hard money lenders and can help you identify the best ones to work with. Attending their meetings will help you interact with them one on one.
- Reputation. Before making a deal, the most important step is staying away from hard money lender scams. Look for trustworthy referrals and reviews to identify the most reputable lender. It is advisable to use one from your locality as examining their credibility is easier.
- Go through all the terms and requirements. Although most lenders have similarities regarding loan conditions and terms, carefully evaluating each is important. Look out for interest rates, down payments, days to closing, loan duration, and borrowers they lend to. Mobile banking has made it easier for money lenders to reach borrowers, but it is important to be aware of the risks before taking out a loan. Having done this, identify the best one that suits all your needs and expectations.
Is a Hard Money Loan a Good Idea?
A hard money loan can either be a good or bad idea. It all depends on your reasons for taking out the loan. If you are in the real estate market, hard money loans can be quite rewarding. First, this loan will serve you well if you want to secure a home faster before the bank begins processing your mortgage. Second, the loan is great for house flippers who understand the real estate market.
If you take the loan for anything other than investing, a hard money loan would be a bad idea. The high-interest rates and short repayment terms might be quite overwhelming, and you could end up losing your property.