Unmasking Hard Money Lenders as Short-Term Property Financiers
Hard money lenders are individuals who give out loans for real estate investing, usually for a short term of between one and five years. The residential property you intend to buy becomes their collateral. Traditional lenders such as banks typically require that you show proof of ability to repay. The process takes time since the lender must go through your credit scores and income history.
One significant aspect of hard money loans is that the borrower obtains funds on the strength of the property they purchase. Owing to the risk involved, this type of loans attracts high rates of interest. Moreover, the duration that is given to a debtor to repay the loan also comes into play.
Overcome the credit score obstacle
Negative credit scores can significantly hamper your chances of approval. Credit history challenges and other frustrations make hard money an ideal option. Hard money is cash held by people like you while soft money comes from financial institutions. Since they too must protect the funds made available to borrowers, they usually impose some restrictions. Fortunately, these are not as tough as those put in place by banks.
Hard money lenders have been around since the late 1950s. To understand their operations, one must first be acquainted with hard money loans. These are loans taken for a short-term and secured through real estate investing. Lenders allow you a credit period of 12 months. However, depending on circumstances, you can extend your repayment term to between two and five years.
Borrowed amount limit
The amount of money you can borrow mainly depends on the investment property value. You may choose to give, as collateral, a property you already own or one you aspire to acquire. Hard money lenders place their emphasis on the real estate value. Although personal credit status comes into play, it does not hold as much weight as the property value. A money lender uses the loan-to-value ratio to determine the amount they can lend.
Type of property that qualifies for a loan
If you own property, you can make a successful loan application. There are no restrictions as to the nature of your possessions. It could be land, commercial, family or industrial property. However, depending on the lender, you could find that you are only able to secure a specific loan amount. You need not feel discouraged since these are merely niche lenders who specialize due to their experience in the area. A better approach would be to find out ahead of time the type of loans they offer.
When to go for a hard money loan
Hard money loans are not appropriate for all types of financing needs. Nevertheless, they could be your savior when you have approached several banks, and they have rejected your application. Besides, when you need the money on short notice, you proceed to secure a hard money loan. An ideal scenario is when you need to act quickly before another investor beats you to the game. Also, if your credit status has a dent, you have no option but to approach hard money lenders.
One reason why investor chooses hard money funding stems from time constraints. If you were to make a bank loan application, it would take the financial institution 30-45 days before they wire the money to your account. Compare this with hard money loans that take one or two days. In some instances, lenders can approve your application in a day.
Urgent need for cash
As a real estate investor, you are aware that the market is highly competitive. You may see a property you like advertised online, but if you come to check again tomorrow, you may not find it – another person bought the treasure. For this and other reasons, it is imperative that you obtain cash quickly. The moment you approach a property seller with an option of closing a sale, they will pay attention and give you an offer. Compare this with the slow financing from a bank, and you may lose the deal.
When banks reject your application
Hard money loans are sound alternatives for borrowers rejected by banks. Circumstances beyond your control may result in a foreclosure. On the other hand, an unexpected situation may hit hard and render one incapable of meeting some financial obligations. These are likely to impact negatively on your credit scores. Also, you may have an income history that banks could deem as insufficient. All the factors come into play and could result in being denied a conventional loan amount. Fortunately, hard money lenders overlook these and only focus on what you have invested in the property to be held as collateral.
As with any borrowing facility, you should be keen to find out about the rates of interest for a hard money loan. There are no specific rates that one can put across with finality. These vary from one lender to another. At the same time, interest rates in, say California are not the same as those in New York for example. Nevertheless, you should expect these to be higher than those charged by banks and other conventional lenders. All the same, you will find that paying high interest rates could work to your advantage since you get cash to fund your purchase price almost instantly.
Unlike the case in other forms of borrowing, lenders of short-term loans will often overlook flaws in your credit status. If they can ascertain that you have invested sufficient equity in the collateral property, you are confident of getting the money. However, you must have a re-payment plan ready plus the lenders will also be interested in how you plan to utilize the real estate acquisition. Of course, your intention could be to re-sell after carrying out improvements or keep it for rental income.
Why you Should opt for Hard Money Loans
- a) Approval takes place quickly
Banks and other lenders usually take from approximately between a month to two months to process an investment loan. Also, there are loads of paperwork involved. For a real estate buyer, you do not have the luxury of waiting this long. Hard money lenders can approve your request in 3-5 days. Besides, there is little documentation.
- b) Assistance from the lenders
Other than providing you with the much-needed money for property acquisition, hard money lenders assist you in choosing an ideal investment. Once you agree, they fast track your loan approval; both parties leave the table a happy lot. The arrangement makes a lot of sense since the lender is confident of getting their money back.
- c) More money than in an ordinary loan
The task of buying real estate and making repairs before putting it back in the market is costly. Conventional money lenders are restrictive on their loan ceilings. However, hard money lenders can give a loan of up to 90 percent of the property value. Depending on several factors, some lenders even finance you up to 100 percent.
As an investor who has recently joined the real estate market, you may not have enough money to make quick purchases. By the time you secure a conventional loan in a month’s time, a competing investor will have beaten you to the task. Besides, 30-45 days is a long time to wait in the property market. A hard money lender will not only finance the purchase price but also lend you enough money to fix the property. Later, you can sell it, make a profit and have enough to repay the loan. All this time, you have not spent a dime of your own.
Most lenders give you up to 70 percent of the property’s after repaired value (ARV). What this means is that you get 70 percent of the home’s value after it undergoes repairs. For instance, assume the house you are seeking to buy is going for $50,000 in its present condition and would require an additional $30,000 worth of repair work. Assume too that after restoring it and making it ready for resale, the house can fetch $150,000, the most you can obtain from a hard money loan is $105,000.
How to find an ideal hard money lender
The easiest and common approach is to search online. You could tweak the search to include your town, city or geographical region. After that, you can start narrowing down to a few lenders whose terms you find appealing. Networking with other real estate investors can also help you find a lender. Ask for recommendations from your fellow property owners.
Hard money loans are a financing arrangement where a borrower obtains funds to buy property whose value acts as security for the borrowed money. It is also known as a bridge loan and is a short-term investment solution. The loans are ideal for real estate investors intending to renovate the property before marking-up and selling it. Your creditworthiness does not come to question when seeking to obtain a hard money loan. Instead, the lender ascertains the property value and determines whether they will lend you the money or not. Often, the value of the property after it undergoes repair is what determines the amount a borrower can get.