Hard money loans are being used by more and more novice investors who have an eye for opportunities but lack the capital to take them on. With hard money, you can borrow funds relatively quickly (and at a high-interest rate) without having to show assets like with traditional bank loans.
Unfortunately, they’re not exactly easy to come by! Here’s a quick guide on hard money loans for beginners on how to find hard money lenders, what types of projects lend themselves well to hard money loans, and some tips on approaching lenders.
What is Hard Money?
As stated above, hard money is considered “high interest” or “tight” lending because it requires less security. You will probably pay higher interest rates than standard financing. However, the uncertainty surrounding your project is greater than with most bank loans, so the risk of default is also higher.
Hard money lenders are looking for quick deals on properties they know will generate a good ROI for them, not long-term holds that are relatively safe investments. If you have an idea that can guarantee a specific rate of return, show lenders projections of what type of cash flow you expect within three to six months.
Keep in mind hard money loans do not allow for renovations or improvements on the property being purchased.
What types of projects lend themselves well to hard money?
Generally speaking, if it’s a business that uses real estate as collateral (such as car washes or laundromats), it’s probably easier to get funding than if it’s an event-driven project (a spa or hotel). If you have already established some revenue for the property through tenant leases or on-site business, it will also help your case.
This is because many hard money lenders are looking for immediate returns rather than long-term hold potential. You’ll need to show that at least some of the mortgages are being paid on time, if not in full.
What are the benefits of hard money loans?
Speed
The first benefit of a hard money loan is it is quick and easy to obtain. The borrower only needs a down payment or earnest money deposit to proceed with the loan process, including finding a lender, negotiating terms, executing documents, etc.
Some lenders can close transactions in as little as seven days from submitting all required information, whereas a term loan will take much longer to be completed.
Flexible
Another benefit of hard money loans is flexibility (i.e., interest-only, balloon payments, etc.). If the borrower can pay off the loan quickly with an interest-only payment option, they would be able to reduce their total cost significantly instead of a traditional bank mortgage where it is fixed and not adjustable for the life of the loan.
Some even offer a “balloon” payment at the end, which allows you to pay down over time like any other real estate investment property with a conventional mortgage.
On top of having flexibility, many borrowers also qualify for better rates than what most banks would provide because hard money lenders typically look at one’s credit scores and income.
Most banks require borrowers to have a 720 credit score or higher when applying for a mortgage, precluding many investors from financing their real estate investments. Banks are more looking at your income, whereas hard money lenders are focused primarily on the ability of the borrower to pay back the loan.
Security
Another benefit of a hard money loan is security, knowing they can take your property if you don’t repay it. This makes hard money loans very secure since borrowers would not lose their investment in their real estate assets because the lender can easily repossess them to recoup their funds.
How do I find hard money lenders?
There are several ways to find them:
- Network with other entrepreneurs in the industry.
- Go through local or state commercial lenders.
- Try finding private investors on the internet.
Hard Money vs. Traditional Financing
Hard money loans are considered riskier because they require less security for borrowing. On the one hand, there’s no appraisal process, so speed will likely be faster than if trying to get traditional financing.
Finding the opportunity for finance guest post write for us, connect with us now!
On the other hand, there are higher interest rates involved (because of more risk), and you won’t be able to improve the property.
Hard money lenders are looking for quick deals on properties they know will generate a good return, not long-term holds that are relatively safe.
Most hard money loans come with interest rates between 12 and 18 percent per year (depending on the lender), which is considerably more than traditional financing. Be prepared to pay origination fees as well. It’s recommended you ask what those fees will be upfront, so there are no surprises later.
You’ll also need to come up with all cash for closing rather than waiting for a bank loan because your project is considered risky, and most banks won’t allow you to take out loans after using hard money lenders.
What do I need to obtain a hard money loan?
The first thing you will need is proof of your idea’s potential: how much cash flow it will generate and what the converted equity will be after renovations or development.
You’ll also need to prove that you have enough equity in the property – usually at least 20 percent – which you can get by showing market comparables of recent sales, and an appraisal if possible, or any improvements made to the property recently.
You should also expect to pay high-interest rates (12 -18 percent per year typically) with origination fees. Plus, most lenders won’t allow “non-performers” in their terms for these types of loans. In other words, they could require you to liquidate or foreclose on the property.
How long should it take for me to get a hard money loan?
Having already done your homework, you should be able to quickly move through the screening process with an experienced lender within three days.
After that, you’ll need at least another week to complete due diligence and work out any final details before closing. Because these deals are usually closed in-person instead of online, time may vary depending upon where you live.
We extend our gratitude and credit to the creators of the YouTube video that perfectly complements our blog post, “A Guide on Hard Money Loans for Beginners.” While the video content was not produced by us, it greatly enhances the information we’ve shared in our blog. We acknowledge the creators’ expertise in shedding light on the intricacies of hard money loans, making it accessible and informative for beginners. We invite our readers to watch the video below, as it adds depth to the concepts discussed in our blog and provides valuable visual insights into the world of hard money loans.
Conclusion
There are many benefits to getting a hard money loan. They usually have quick turnarounds when you apply for them, which is beneficial because they can provide immediate access to funds, whereas bank term loans take longer.
In addition to being quick and easy to obtain, borrowers may also qualify for better rates than what banks would offer due to looking at your credit score/income primarily, while some lenders even offer more flexibility and security (i.e., interest-only, balloon payments).
Banks require a 720 credit score or higher to be approved for a loan, whereas hard money loans do not so they will also benefit if your credit score is lower than what banks would require.
Finally, hard money lenders like DFW Specialty Lending offer security in knowing that you can’t lose your investment since the lender can take it back if you don’t repay them, which is very beneficial when investing in real estate.
Post You May Also Like