Traditional bank loan criteria are extensive; however, hard money loan procedures are not.
But why would someone choose a hard money loan over a conventional one? What are the prerequisites for a hard money loan?
When buying a new house, many Americans use typical bank loans. However, traditional bank loans are more challenging to get than hard loans.
The number of property flips in America is significant. For example, there were approximately 300,000 fix-and-flips in 2016, representing a $56 billion business.
Homeownership rates are high at around 65%, whether a buyer is looking to acquire a fixer-upper or a recently remodeled house.
Continue reading to find out how to get a hard money loan and the rates and conditions.
What Exactly Is a Hard Money Loan?
Property is frequently used as collateral for hard money loans. Traditional banks, on the other hand, make choices based on factors such as:
- The borrower’s creditworthiness
- The borrower’s financial history
- The borrower’s repayment capacity
Acquiring a standard bank loan may be time-consuming and laborious as the lender investigates an individual and their credit history.
The collateral is more critical with hard money loans. The lender seizes the property as payback for the debt if a borrower fails to make payments.
A hard money loan, often known as a short-term bridge loan, is a form of a loan secured by real estate. Individuals or private firms, not banks, are hard money lenders.
While hard money loans were initially seen to be a last-resort choice, they have risen in favor, and you may get a terrific bargain if you look around.
What Are Hard Money Loan Interest Rates?
Points might vary from 2% to 4% of the total loan amount. The costs charged by the lender for providing the loan are referred to as points on a hard money loan. The debt is represented by each point being a percentage point of the debt.
The top hard money lenders provide low lending rates, but if anything appears too good to be true, it most likely is. So ensure you work with a trustworthy lender before signing on the dotted line.
Interest rates typically vary from 6.375% to 18%, depending on the lender and the perceived risk of the loan.
Who’s Right for a Hard Money Loan?
Those who many institutions have turned down traditional loans may opt for a hard money loan. However, foreclosures, short sales, credit difficulties, and income history can substantially influence one’s ability to obtain a standard bank loan.
Even though a borrower is in a higher salary category, if it is new employment with no significant earning history, bank lenders may still decline the applicant.
As long as the borrower owns enough equity funding in the property, hard money lenders will look past all these matters.
The ability of the loan to be financed swiftly is the primary reason borrowers choose to take out a hard money loan. In most hard money lending scenarios, the money is usually funded within a week. A standard bank loan, on the other hand, usually takes 30 to 45 days to complete.
A rapid closing with a hard money loan will grab the seller’s attention if a real estate investor is looking to purchase a property with several competing offers.
Hard money loans are ideal for circumstances such as:
- Mortgages for land
- Construction financing
- Repairs and flips
- If the buyer has credit problems
- When an investor must choose a rapid decision
When regular banks are not an option, and a borrower requires cash quickly, hard loans are the ideal choice.
How One Can Apply for a Hard Money Loan?
Lenders’ needs for hard money loans collide. Because private individuals or businesses frequently make hard money loans, there is more significant space for negotiation.
There are three primary hard money loan conditions in general.
Overall Financial Stability
Another frequent benchmark for hard money loans is that the borrower has adequate cash resources to cover any holding expenditures and monthly loan installments. Taxes, HOA fees, and insurance are examples of holding expenses.
The more cash reserves a borrower has, the more likely they will be authorized for a hard money loan.
A loan is typically difficult to secure for an applicant without monetary resources. However, in rare circumstances, a lender is ready to raise the loan portion and withhold some of the borrower’s cash to cover loan charges, taxes, insurance, and other holding costs.
In this situation, the borrower still receives their loan, but the lender guarantees that monthly installments are not missed.
Real Estate Knowledge
Most hard money lenders are curious to learn about the borrower’s real estate background.
A first-time fixer-upper borrower may have more difficulty obtaining a hard money loan than a seasoned real estate investor.
If the borrower has limited expertise, the lender will need project information, including an exit strategy for the property. In addition, they’ll want to know how the borrower intends to repay the loan.
Down Payment/Equity
The critical requirement for acquiring a hard money loan is to have the equity or requisite down payment in a specific property to use as collateral.
The minimal amount often varies from 25% to 30% for residential properties and 30% to 40% for commercial structures.
A lender may sometimes enable a borrower to use multiple properties to finance a single loan. Borrowing with one loan for several properties is known as “cross-collateralizing.”
Borrowers with more significant equity or a larger down payment have a better chance of being accepted—the more the borrower’s investment in the property, the lesser the lender’s risk.
How to Choose the Best Lender
Even if you’re in a hurry to receive cash, be sure you’ve identified the correct lender for you and your borrowing needs. Then, avoid making a financial blunder by following these five hard money loan errors.
Even if you’re pressed for time, ask questions to ascertain if you’ve located the correct lender for you.
Here are some queries you should ask forthcoming hard money lenders:
- Are you a broker or a direct lender?
- What project information/documents are required to deliver a quote?
- Do you check people’s credit?
- What type of credit score do you want?
- How long does it take to obtain a quotation?
- Where do you get your money?
- What if I must expand my loan?
- How do you handle arousal? Is it paid monthly, in advance, or after the loan term?
- Have you been lending for a long time?
It’s not difficult to identify the correct hard money lender with a bit of research, asking around, and reading reviews.
Take a Minute to Find the Best Lender
If you do not fulfill the hard money loan standards, chat to your lender about possible negotiations since hard money lenders are more ready to work something out than regular banks.
Hard money loans are good answers to a wide range of financing demands, particularly real estate.
In many matters, a hard money loan is a superior alternative for acquiring the finances you need to buy, develop, or renovate your home.
The conditions for a hard money loan are not concrete.
A hard money loan might be the only answer to your borrowing needs if you need a short-term loan and have a suitable parting method.
Although there are conditions for hard money loans, they are not as strict as typical bank loans.
Depending on the individual or the organization, many hard money lenders are ready to engage with potential borrowers in ways standard banks are not.
What is the timing of getting a Hard Money Loan?
Many property flippers employ hard money loans because they want to repair and sell the home within a year and use the property as collateral for the loan.
In these circumstances, the borrower’s intention to repay the loan quickly is compensated for the high cost.
Hard money loans are frequently acknowledged and underwritten within a few days.
Most hard money loans have periods ranging from one to three years. Hard money loan rates are often higher, so it makes sense to acquire one if you intend to pay it off promptly.
Wrapping it Up
We hope you found this article helpful on how to get a hard money loan. If you are in need of a short-term loan, a hard money loan may be the right option for you. These loans can be quickly approved and are much simpler than obtaining a traditional loan. However, the interest rates are often higher. These loans are typically available for a term of one to three years and are usually based on the value of the property versus an individual’s credit score. At Liquid Logics, we are dedicated to providing the best private lending software on the market. If you are a lender, looking for a better solution for your loan management needs, contact us today!