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If you’ve already determined that you’re going to get a hard money loan, the next step will be figuring out exactly how to go about it. You may know what hard money loans are, but you’re unclear as to what the qualifications will be, how to find a good lender, and what questions to ask. The following tips can help.
What is a hard money loan?
A hard money loan is a loan extended primarily to real estate investors so that they can finance short-term real estate purchases. The loan is given by individuals or organizations who specialize in giving loans for these purposes.
How do you qualify for a hard money loan?
Now that you’ve decided to get a hard money loan, you need to understand what you need to bring to the table in order to qualify.
The great thing about hard money lenders is that they generally don’t use your credit score and personal financial information in order to qualify you for the loan. What they will use is collateral. That collateral will be the property that you’re intending on purchasing. The lender will want to know what the value of a property is now and what the value of the property will be once you’re ready to sell it. To this end, they’ll look for a full appraisal on the property before they agree to lend.
A down payment
Most hard money lenders will require you to put some sort of down payment down. They’ll either base the down payment on the value of a property as it stands now, or they’ll base it on the value of the property once you have rehabbed it and it has sold. If they base the amount of the down payment you have to pay on the value of the property after you have repaired it, that is considered the after repair value (ARV). If they base the amount of the down payment on the current value of the property before any rehab has been done, they’ll be using the loan-to-value ratio, or the LTV.
Where To Find Reputable Lenders
Finding a reputable hard money lender is key. Because the hard-money loan market is generally not regulated by the government, it’s easy to run into unscrupulous lenders who could end up making you pay a lot more than you intend to for your loan. In order to avoid a predatory lender, reach out to other investors in your community who have used hard money lenders, and see who they recommend.
You can also check out blogs like BiggerPockets.com that provide access to extensive lists of reputable hard money lenders.
Once you get your list of lenders, it’s time for you to do your due diligence. Do a Google search on each one, and make sure that there aren’t any outstanding complaints against them from either individuals or past investors. Go online and ask in well-known and reputable forums to find out what people think of the lenders that you’re considering. The ultimate goal is to make sure that you’re completely covered since this is a huge financial decision.
Questions that you should ask your hard money lender
Once you find your lender, there are a few questions that you should ask them so that you can make a qualified and informed decision.
Find out how the loan will be repaid.
Some hard money lenders require that you only make interest-only payments during the term, while others don’t require any payments at all. A lot of hard money loans are repaid in full via a balloon payment at the end of the term, but don’t assume that that’s how your hard money lender will be doing it. Nail down those details
Find out exactly what fees you’ll be responsible for.
Some lenders carry certain fees like origination fees and early prepayment penalty fees, while others don’t have those. Find out from your lender exactly what you will be responsible for.
Find out how long they been lending.
If you’re a newbie to the hard money lending world, you’re going to want to go with someone who has a lot of experience and can walk you through the process in a way that makes you feel comfortable.