Escondido-California Hard Money Loans
If everyone purchasing real estate could be easily approved for a mortgage, the process would be perfect. Unfortunately, many people have past issues with bankruptcies, poor credit, or other similar difficulties. For real estate investors with these problems, banks are not an option. Instead, many investors rely on hard money loans from private individuals and institutions, all of which must possess valid real estate licensing in their state to conduct business. While these loans have advantages and disadvantages associated with them, investors find them a useful tool on many occasions. If you are examining various ways in which to finance your next investment project, here are the most important points regarding hard money loans.
How Can I Use a Hard Money Loan?
As an investor, you can use a hard money loan for almost any type of project. Whether you are purchasing a piece of land on which you want to build, or perhaps purchase rehab properties for a fix-and-flip venture, the possibilities are almost endless due to the flexibility associated with these loans. And while most lenders of hard money loans choose not to provide funding for those individuals seeking to purchase owner-occupied properties, some lenders do choose to provide loans for these properties as well. But since doing so requires them to follow many more regulations and assess the applicant’s ability to repay the loan, it is generally viewed as not cost-effective for them to pursue these projects.
What is the Payback Period?
For a hard money loan, the payback period is much, much shorter than a mortgage. In most cases, the lender will only give the investor 12 months to pay off the loan, which puts enormous pressure on the investor to make sure their property sells within that period of time. Along with the short payback period, the hard money loan will also be sporting very high interest rates, often exceeding 15 percent or more, and many fees for underwriting and origination. And if you plan to pay off the loan early, you will be penalized for doing so. Therefore, while considering these loans, it is best to also explore other financing options that may have more favorable financial terms and conditions.
Collateral for a Hard Money Loan
When you apply for a hard money loan, the collateral used for the loan will be the property you are wishing to buy. Because of this, the value and condition of the property will play a big role in determining not only if you will be granted the loan, but also how much money you will get from the lender. To make this determination, the lender will examine the property’s loan-to-value ratio, or with fix-and-flip properties the after-repair-value ratio. If these are favorable to the lender, your loan will usually be approved. Therefore, if you will be buying a property for $100,000, the lender will probably give you as much as $90,000 to make the purchase, meaning you will only need $10,000 to complete the transaction.
Stay Away from Loan Sharks
Since there are few regulations surrounding hard money loans, it is the perfect feeding ground for loan sharks. Because they know some investors may be desperate for quick money, they make offers that may sound too good to be true. To be sure you are not dealing with a loan shark, use common sense on many fronts. For example, most loan sharks provide little if any paperwork, charge exorbitant interest rates, are not licensed, and may even use threats of physical violence if the loan is not paid back on time. Rather than put yourself in a potentially dangerous situation financially and physically, always ask other investors or real estate professionals to put you in touch with reputable hard money loan lenders.