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Fairfield-California Hard Money Loans
When seeking out a real estate loan, the usual process for most people is visiting a bank to apply for a mortgage. However, since this can be a time-consuming process and be prohibitive to those who have problems with bad credit or bankruptcy, other options such as hard money loans may make more sense. A different type of real estate loan, hard money loans offer such benefits as easy application and approval processes, large amounts of money in only a few days, and flexibility to be used for many types of investment projects. Yet despite these many perks, they also have many aspects that can lead to financial difficulties if investors do not use them wisely. To learn more about these loans, here are some important details to remember.
Short Payback Periods
If you seek out a hard money loan, be prepared to pay back the loan far quicker than a regular mortgage. Instead of having decades to pay off the loan, your lender will expect payment in full within no more than three years, and in most cases only 12 months. Because of this, you should always have a plan in place that will guarantee the property you purchase will be sold quickly enough to allow repayment of the loan. If this does not happen, you may face not only additional fees and higher interest rates if you apply for an extension, but also possible foreclosure on the property by the lender.
What About Collateral?
When applying for a hard money loan, the collateral used for the loan will be the property being purchased. Instead of examining the applicant’s financial history to determine their ability to repay, the lender will be more interested in the property’s loan-to-value or after-repair-value ratios, both of which will determine how much money they are willing to lend. As an example, if the property is valued at $100,000, the lender will probably lend $80,000 toward the project, meaning the investor will only need $20,000 of their own money to complete the purchase.
Private Individuals and Institutions
Instead of getting a hard money loan from a local bank, investors will instead be working with private institutions or individuals to secure these specialized loans. While the advantages of this include quicker approvals and greater flexibility in how the loans can be used, the downside is there are few if any regulations surrounding these loans. As a result, the lenders often charge very high interest rates, tack on a variety of fees, and can essentially create any loan terms they wish, so long as the applicant agrees to their terms.
Plan Ahead of Time
If you decide to pursue a hard money loan for an investment project, have a plan in place well ahead of time. For example, if you are planning to purchase fix-and-flip properties with the loan, make sure you are not stuck in a buyer’s market, where the properties may not sell as fast as anticipated. Since you may only have one year to pay off the loan, always be sure you are virtually certain your plans for the project will come to fruition in time to pay back the loan. Otherwise, foreclosure, refinancing, and higher interest rates and fees may be on the horizon.
Ask Plenty of Questions
When meeting with a hard money loan lender, don’t be shy about asking as many questions as possible to make sure you understand how the loan works. For example, always ask about the payback period, interest rates, how much experience they have in providing these loans, and if they have a valid real estate broker’s license, since this is a requirement for those offering these loans. By asking these and other questions, you can be sure your lender is reputable.