When it comes to getting a hard money loan, you’ve already made your decision. You’ve decided that this type of loan appeals to you, but you’re not exactly sure where to start the process. Once you understand exactly how hard money loans work, you’ll be able to make a smart decision about how to go about getting one the right way.
What is a hard money loan?
A hard money loan loan is a short-term real estate loan extended to investors by individuals or organizations. You don’t need great credit to qualify since the hard money lender uses the property you’re buying as collateral. You get your money in as quickly as a week, making it a great option for people who want to be a part of fast-moving real estate deals.
On the flip side, hard money loans have high interest rates which impact the final payment that you’ll owe. They’re also due in full at the end of the loan period, meaning that the property needs to sell by that time. This wouldn’t be an issue if the hard money loan periods were long, but they rarely last longer than three years and usually only last one. If the property sells, you’ll be fine. If it doesn’t, you’ll have to handle the fallout.
What questions should you ask a hard money lender?
Before you sign on the dotted line with a hard money lender, you need to ask them a full list of questions. Being fully prepared can help you decide whether you’re going to go the hard money route or the more traditional route. Some key questions are below.
Do you provide loans for owner-occupied property or just investment property?
Most hard money lenders prefer to only lend money to investors. The reason behind this is because when they loan money to individuals to be used as owner-occupied dwellings, they will be required to have stricter lending criteria than they would if they were simply lending the money to investors who are buying property for investment purposes.
This question is primarily for people who are hoping to use a hard money loan to purchase a home that they will be using as their primary residence.
How do you expect the loan to be repaid?
Many hard money lenders don’t require people to pay principal at all during the loan period. At most, they’ll require interest-only payments or no payments at all. The reason behind this is that they intend to be paid once the property is sold at the end of the loan period via one large balloon payment. Every hard money lender is different, so check with the ones that you’re interested so that you know exactly what will be expected of you.
What type of interest rate do you charge?
Find out what interest rate the lender will charge. Many hard money lenders will not advertise the interest rate that they charge, so nail them down and ask them. A few percentage points difference could cost you a lot of money. Depending on the lender, you may be able to work out a solution that works for both of you.
How much experience do you have in the hard money lending industry?
The hard money lending industry is not regulated, making it perfect for predatory lenders to take advantage of unsuspecting borrowers. In order to make sure that this doesn’t happen to you, make sure that the lender lets you know exactly how long they’ve been in business and what kind of deals they’re been responsible for. If you’re new to the hard money lending arena, you’ll want to go with a company that has a lot of experience so that you can be confident that they know what they’re doing.