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Hard money loans are an excellent real estate investment tool. These loans are provided by individuals and organizations to investors looking for short-term real estate financing. They’re extremely popular with people who want to get into booming real estate markets as well as those looking to simply build an investment portfolio. It allows them away to secure financing without having to go through traditional banks, which don’t usually lend money for short-term real estate investment schemes..
If you’ve gotten to the point where you know that you’re definitely going to go for a hard money loan and you’re ready to speak to a lender, there are some questions that you should ask so that you have all the answers you need to make a fiscally responsible decision.
What exactly is a hard money loan?
A hard money loan is a short-term real estate investment loan that allows investors to quickly borrow money and finance investment properties that they’ll buy and sell for profit. These loans are for short periods of time, usually lasting anywhere from six months to three years. After the loan period is up, the idea is that the borrower will sell the property and repay the loan.
Questions to Ask Your Hard Money Lender
Do you lend money to people looking to by owner-occupied properties?
This question would be for people who are hoping to use a hard money loan to purchase an owner-occupied residence that they will be living in themselves. Hard money lenders usually don’t like to be involved with lending to individuals. The issue here is that if they do, they’ll have to follow tighter government rules and apply stricter lending criteria in order to get the borrowers approved.
This is as a result of the Dodd Frank Act that was put into effect in 2010 to make sure that banks applied strict lending criteria to consumer borrowers to ensure that they were financially qualified to handle the loans that were extended to them. Hard money lenders don’t like to work with these types of loans because they requires extra paperwork, rules and oversight.
How do you expect the loan to be repaid?
Some hard money lenders don’t expect any month-to-month payments from their borrowers during the length of the loan. Some lenders require that borrowers make interest-only payments during that period. All lenders require that the full amount due is paid at the end of the loan term via one large balloon payment that will ostensibly be funded via the sale of the property. Find out exactly how the lender that you’re interested in has its borrowers pay back their loans.
What experience do you have with hard money loans?
This is a very important question to ask, especially if you are a newbie when it comes to hard money loans. You want to make sure that the hard money lender that you choose has a lot of experience with the type of property that you’re buying so that they can guide you through the process and alert you to any pitfalls that you may not be aware of. You also want to choose a lender based on their specialty. This means that if you’re going for a land hard money loan, you’re going to want a lender that has experience working with land hard money loans.
What are the fees and what is the interest rate on the loan?
The principal of the loan is the bulk of the loan, but the interest and fees will also really add up. Interest rates for hard money loans are high, often reaching 15% or higher due to the risk associated with this type of real estate. Find out from your lender exactly how much interest you will be expected to pay. You’ll also want to find out what fees you’ll be responsible for. Many lenders include fees like origination fees and early prepayment penalty fees.