You have a lot of questions about hard money loans. You’ve heard that they could be really good investment tools for people looking to make short-term real estate purchases. You’ve heard all the pros and cons, but you still want to find out more.
Hard money loans are short-term loans provided by individuals or organizations to people and investors looking to make short-term real estate purchases. The loans are usually extended to people who are doing things like flips and construction companies that are doing builds. The pros to hard money loans include extremely fast funding, with borrowers often getting their money in less than a week. They’re also very lenient when it comes to credit qualifications, frequently approving people who have less than stellar credit because they use the property that is being purchased as collateral.
On the flip side, hard money loans have really high interest rates, impacting the final amount that needs to be paid when the loan comes due. The industry is also not really well governed, opening the door for unscrupulous lenders to walk through.
Given all of this info, you may have even more questions regarding the hard money loan process and how it will impact you. Following are some frequently asked questions regarding hard money loans.
Can you qualify for a hard money loan if you’re not an LLC or another type of formal business structure?
Because of government regulations, most hard money lenders prefer to lend to businesses or investors set up as LLCs or other business structures. The reason for this is that if the lenders decide to loan to individuals, they will have to use different lending criteria, including making sure that the individual is able to pay back the loan. These stricter guidelines make it less attractive for both the lender and the borrower, so hard money lenders tend to stick to businesses.
What type of paperwork do I need to show the hard money lender to ensure that I can pay off the loan when it’s due?
Hard money lenders will usually require that you have some sort of plan in place that will show how you plan to pay off a loan when it comes due at the end of the loan term. Be prepared to bring that paperwork to make your approval process easier.
Do I need to get an appraisal of the property that I’m buying before I contact my hard money lender?
Hard money lenders will determine how much money they’re going to lend you based on how much the property you’re planning on buying is worth. Remember that the property will be used as collateral, so the lender will want to get an independent appraisal. You’ll probably also want to get a home inspection and a survey done so that you can seal the deal.
What if I want to take out a hard money loan for the purchase price as well as the repair and remodeling costs?
Many people who are interested in flipping properties will want to take out a loan covering not only the purchase price of the home but also the amount of money that it will cost to fix and repair the home. Many hard money lenders will help investors do this. These are usually hard money loans that are called fix and flip loans.
When it comes to lending you the money, the hard money lender will either lend you a percentage of the ARV, or the “after repair value” of the home so that you can start working on and fixing the property up immediately. Other lenders will work with you so that you get a loan for the property and a separate loan for the repair costs. When you need to get additional money for repair costs, you simply have to submit paperwork with an estimate of how much the work will cost, and you’ll receive the cash. Money loaned in this way is called a construction draw.