Hard money loans are basically short-term secured loans that typically take real estate as collateral. Hard money lenders are private investors and could be an individual, a group, as well as a licensed mortgage broker lending out his own funds. This lending system is significantly different from banks that use their depositors’ money for these ventures. It poses a very interesting choice for prospective borrowers, which is why it is worth figuring out what the perks and pitfalls of hard money lending are, and how you would go about securing one of these loans.
Understanding Hard Money Loans
As mentioned before, hard money loans are short term, anywhere between 1 to 5 years, and are secured by real estate. The monthly payments involve a principal plus some interest or sometimes just the interest with a balloon payment right at the end. The amount loaned out depends both on the value of the property put up as collateral as well as the lending capacity of the hard money lender. Already-owned property can be used as collateral, but there are also options to use the property that buyers seek to acquire as collateral directly. Typically, hard money lenders are less concerned with the creditworthiness of the borrower (although this is a fairly important factor still) and more with the value of the property they stand to receive.
If a borrower who has not had luck with securing conventional financing after a foreclosure or short sale has a considerable equity in the property being set as collateral, hard money loans should be a feasible choice for him. This makes them more than just an alternative to bank loans with all the same use-cases. These loans take anywhere between a week and a month to get approved, which is great. The interest on them is significantly higher, typically between 12% and 21%. Hard money lenders may also charge points, right in the beginning, where a point corresponds to 1% of the loan. It is typical for them to charge 3-6 points for a standard loan. You may visit reputed and trustworthy sites such as https://www.libertylending.com/ for prompt loan approval and disbursement.
Who and What Are They for?
Most kinds of properties are good for hard money loans, ranging from land or commercial and industrial property to single or multi-family residential properties. That said, a number of lenders specialize in or only seek a particular property type due to existing regulations, past experience or personal preference. Not all deals are a good fit for hard money loans, though. If you are purchasing a primary residence, are not faced with issues like foreclosures or short-sales, and have a good income and credit history you might want to go the conventional bank route. But if that route seems infeasible or you need quick access to funds, hard money is the way to go.
Some situations for which hard money loans are extremely beneficial are:
Fix and Flip: If you can pick up a house in disuse, disrepair, and disarray for a low price but are convinced that you can fix it up and make a profit on it soon, it doesn’t make sense to take a ten to fifteen-year loan on it through a bank.
Construction Loans for Builders: A lot of contractors use hard money loans to purchase a lot and launch a big project on it, after which the structure is sold for a significant amount and the loan paid off quickly.
Land Loans for Investors: Real-estate investors are always on the lookout for great deals, and they understand the importance of quick action. If they don’t have enough money in hand, it makes sense to go for a fast-tracked hard money loan to ensure they get the scoop.
Buyers with credit issues: As discussed before, any prospective borrowers who have red flags on their credit report like defaults on previous loans, foreclosures or so on are likely to be rejected by a bank; which means hard money loans are not only their best but perhaps their only option at getting access to funds.
Factors to Consider While Choosing a Hard Money Lender
You must be alert while scoping out a hard money lender for your venture. While there are a lot of reliable lenders out there, there are a number of predatory entities that are looking to take advantage of vulnerable folks. Try going through direct channels and avoiding intermediaries. Here are some important factors to consider while choosing a hard money lender.
Do Ample Research
It is important to devote some time and energy toward researching customer testimonials and online reviews. Very happy customers and very disappointed customers are most likely to write reviews and share online. You must go through the reviews and see how the agencies are responding to these reviews. If you find a lot of criticism about the company but if there is no effort on the part of the hard money lending company to justify their position then you must try to look for someone else. Most reliable companies are very concerned about any negative feedback and they try their best to resolve the issue amicably and they take proactive steps in that direction.
Discuss With Your Network & Ask for Referrals
An important way to identify a reliable hard money lender is by consulting with your other real-estate investor friends. Request them for referrals of money lenders they must have used and found the services competent and trustworthy enough. If the moneylender you have shortlisted is a legitimate one, your friends may have worked with him or at least, they have heard about him. You need to seek advice from other investors and use important information from them to choose the right money lender for your unique requirements.
There are two kinds of scams which are very popular in this industry, so you should look out for them at all times.
Bait and Switch: Bait and switch methods are employed by legitimate lenders who do not have an ethical approach to their business. They will initially prepare a term sheet which is extremely attractive and hard to turn down for the borrower. Once talks have progressed to the extent that other lenders are out of the question, these lenders will adjust all or most of the important agreed-upon terms and the borrower will be left with no option but to accept them. This is done by stating fine-print which is loaded with jargon and almost always impossible to find or understand. The value of the appraisal is undercut randomly, and sometimes they outright state that they have reconsidered the terms. What the borrower is left with is a deal that gives them less money than they need at a higher interest rate or more points up front than they can afford.
Catch and Release: This is also a very popular scam where the company seems legitimate throughout initial talks and will likely get you to sign a contract with them and pay them an application fee and a variety of advance payments for services to be rendered. Soon after, you will find that your calls and emails are going unanswered and there is nothing you can do about it because the lender is pretty hard to track down. You will have to write off the money spent on the scam and move on to another lender.
Detecting hard money scams can be tricky because of how good people are at cheating others. That said, with proactive measures and some common sense, you can avoid most scams. Deals that look too good to be real are probably just that. 100% financing or minimal information required with immediate approval probably is a lie; most investors only go up to 90%. Follow your gut and try to get all documents and fine print vetted by a trusted advisor in the field. Try to get referrals from family and friends, visit lenders who are established as legitimate and trustworthy, and do your due diligence before arriving upon an agreement.
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