How Can Hard Money Loans Be Used?
For a real estate investor, a hard money loan can be used for virtually any type of project. In many cases, investors who specialize in purchasing fix-and-flip properties use these loans to quickly buy properties, make the necessary repairs, and then sell them for a profit. In other cases, investors may purchase an existing building or piece of land and then begin a construction project they hope will yield significant profits. Because of this, investors like these loans due to their flexibility, which can allow them to approach a lender with various ideas for the loan.
Details of a Hard Money Loan
If pursuing a hard money loan, investors need to become familiar with some of the details that make these loans so different from a mortgage. To begin with, the collateral used for the loan will be the property being purchased, which eliminates the need for the lender to check the investor’s ability to repay the loan. Along with this, the payback period for this loan will probably be no more than 12 months, making it imperative the property bought by the investor be sold within this period of time. If it is not, they risk foreclosure from the lender, or at the least having to refinance or extend the loan at higher interest rates. Finally, since these loans have few regulations, the lender can charge numerous fees such as for underwriting and origination, and can also add fees to penalize the investor if they want to pay off the loan earlier than the stated deadline.
With a hard money loan, the final payment will be a balloon payment, and it often proves to be rather large. Since the previous payments will have been interest-only payments, the balloon payment will include remaining interest plus any principal, fees, and interest that remain. If this is not factored into an investor’s financial planning for the property, they may find themselves unable to meet this final payment.
Will I Need a Down Payment?
In almost all situations where a hard money loan is granted to an investor, a down payment will still be needed to complete the purchase of the property. Since the lender will examine the property’s loan-to-value ratio to determine how much they are willing to loan, it is recommended investors be prepared to have a down payment of as much as 20% of the property’s value. Thus, for a $100,000 property upon which a lender gives a loan of $80,000, the investor will need to have immediate access to $20,000.
Are All Lenders Reputable?
While virtually all hard money loan lenders are reputable private individuals and institutions, there are still some instances where loan sharks attempt to masquerade as reputable hard money loan lenders. Thus, if an investor attempts to do business with a lender who has little if any paperwork, charges extremely high interest rates, is not licensed by the state’s real estate board, and uses direct or indirect threats of violence or retribution if payments are not made on time, immediately look elsewhere for funding.