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While investing in real estate is one of the most effective ways to build wealth, it can be difficult to pursue for those who have had past problems with bankruptcies and bad credit. While banks typically decline to provide financing to these individuals, hard money loan lenders do the opposite. Rather than being concerned about an investor’s ability to repay a loan, they focus on the value of the property the investor wishes to purchase, since this will be collateral for the loan. Offering a unique way to obtain financing for investment projects, hard money loans are worth looking into for many reasons.
Whether an investor wants financing to purchase a property they will fix and flip, start a business, or perhaps begin a construction project, hard money loans can be used for these and many other purposes. Since an investor will bypass a traditional bank and instead seek out hard money loans from individuals or private institutions, these loans offer much greater flexibility, since the lender will be able to assess the investor’s ideas on a case-by-case basis.
Rather than wait weeks or even months to secure financing for an investment, real estate investors can often obtain hard money loans in no more than one week. This ability to get quick cash, along with an application process that is far less complicated than mortgage applications, make these loans very attractive to investors eager to move quickly on purchasing property. However, be aware these loans also come with far shorter payback periods, usually 12 months. Therefore, before saying yes to a hard money loan, make sure you are certain you can sell the property or have the money needed to pay back the loan when it comes due.
With most hard money loans, investors will not make equal monthly payments toward principal and interest. Instead, they will likely make interest-only payments each month, with what might be a rather large balloon payment at the end. Since these loans carry very high interest rates, the balloon payment will not only include a large amount of interest, but also any remaining principal and fees for origination, underwriting, and other fees that were assessed when the loan was granted.
Very Little Regulation
Because hard money loans are made by private institutions and individuals, there are very few regulations in place pertaining to these loans. Therefore, when deciding to pursue financing in this manner, always be sure you have exhausted all other options before doing so. Since some people view these loans as coming from predatory lenders, always make sure you fully understand the terms of the loan before signing on the dotted line.
Finding a Reputable Lender
When you are looking for a reputable hard money loan lender, always start by asking other real estate investors in your area. After all, there is a good chance many of them have used or are currently using these loans to make purchases, so they should be able to let you know which hard money loan sources are reputable. However, even after getting recommendations from other investors, do your homework by conducting your own research. Along with an online search to see if there are any negative reviews or other information about the lender, contact your local Better Business Bureau to find out if any complaints have been made against the lender. Once you are satisfied with the information you have found, select several lenders, schedule meetings with each, and soon you may have the financing needed to purchase that prime piece of investment property.
By doing some research beforehand and knowing what questions to ask along the way, obtaining hard money loans can be fast, easy, and profitable for both you and the lender.
Property ownership of all kinds has paved the road to wealth for millions of people. While it’s almost always a worthwhile investment, financing it can be a real challenge for investors and some kinds of borrowers.
Enter the world of hard money loans. These are ideal financing vehicles for non-standard property purchases. Sometimes these loans are called:
• Bridge loans that offer short-term financing until a conventional mortgage is in place.
• Construction loans that fund building a home or other structure.
• Fix-and-flip loans make funding available for property flippers to rehab speculative purchases.
• Owner-occupied loans are geared toward people who can’t get a mortgage through a conventional lender.
• Investments outside of real estate can be funded with hard money loans as well.
What Are Hard Money Loans
Unlike a mortgage that is secured by the property and your ability and likelihood of repayment, hard money lenders don’t always consider your likelihood of paying the loan back. They secure your collateral and adjust the interest rate based on the risk you pose.
Unlike banks or mortgage lenders, hard money lenders aren’t large institutions and not subject to all the regulations that banks are. They’re generally a group of investors looking for profitable opportunities. They are subject to usury laws, which vary state-by-state, as well as the Dodd-Frank guidelines for loan limits.
What Are the Benefits of Hard Money Loans
Businesses turn to these loans when they need:
• Financing for a project or purchase that a conventional lender wouldn’t be able to tackle.
• Quick financing. The mortgage process can take weeks or months, but a hard money loan takes days instead. In a sellers’ real estate market, time is everything. The first bidder to put up the money gets the property.
• Financing with poor credit. Hard money lenders either don’t consider your credit or pay much attention to it. Instead, they base their decisions to fund on the quality of the property or investment.
Hard money investors are more interested in the quality of the investment or project than your credit rating, which speeds up the loan processing. You may be able to get the funding within 48 hours of applying. You won’t lose a lucrative opportunity while you wait for loan approval.
Loan Terms and Repayment
When you’re buying real property, the lending group will probably require an appraisal and possibly an inspection. Their primary concern is the property itself and if there are defects beyond what you’ve reported, they may not be as willing to lend.
The term of the loan is usually short, and the loan period is tailored to the project. It could run from six months to a year or more. It depends on the property or endeavor. The lender will probably charge you points for issuing the loan, paying it off, or even accepting the monthly payments.
Unlike a mortgage where you make a principal and interest payment monthly, you’ll probably make just monthly interest payments with hard money financing. At the end of the term, you’ll have to make a balloon payment, which consists of the loan principal along with any unpaid accrued interest. Regardless of how you pay back the loan, be sure you can make all the payments on time.
Downsides of Hard Money Loans
These loans are of a short duration and almost always have high interest rates. Think of them as credit cards with high limits. The riskier the project, the higher the interest rates.
Besides the cost of these loans, there are a few other situations where you should avoid them.
• If you’re buying a property in a down market, it may take longer than the loan term to resell it, leaving you responsible for the entire loan amount. You may have refinance if you’re still holding the property.
• The interest rates are high. If you can get a lower interest mortgage loan, you’ll save money.
When you need money fast, look to a reputable hard money lender for a solution. Be sure that they have a real estate license in your state and are clear about every aspect of the loan terms.[flexy_breadcrumb]