Though hard money loans are often fairly simple to qualify for, it is still important to take an in-depth look at this particular financing option. While these types of loans are most often used in real estate investment, there’s still a lot that many investors don’t know about hard money loans.
What You Need to Know About Hard Money Loans
There’s more to hard money loans than fast cash. Though they are an excellent alternative to more standard methods for financing, it’s important that you understand the ins and outs of hard money loans. The following questions help to explain the hard money loan process and how to qualify for a loan:
Do hard money loans always have high interest rates?
While every hard money lender is different, most of these loans do have high interest rates.
The rates reflect the level of risk that the lender is taking on. Since these private lenders in Rochester, New York are agreeing to loan an investor money without checking their ability to repay the loan, they don’t have a physical guarantee that the investor will make good on their agreement. In the case of the investor defaulting on the loan, the lender will have to spend their own money to deal with the foreclosure of that person’s property.
Additionally, the high interest rates are a casualty of the business. Lenders are out to turn a profit as well and this is a business for them. Despite all of this, many investors are fine with paying these interest rates as these loans are for short-term periods.
How do investors afford the large balloon payment?
If you’ve yet begun to research hard money loans, you may find the idea of making the balloon payment once the loan ends to be particularly alarming. With other loans, investors make multiple payments to repay the lender. This isn’t usually the case with hard money loans.
With a large balloon payment, lenders expect the investor to pay everything when the loan is due. This includes the interest, additional fees, and the loan in full. Investors options for handling this balloon payment include selling their property, extending their loan, and refinancing the loan through other financing options.
What properties should I purchase with hard loans?
Hard lenders are often open to lending money for almost any type of property. Whether you’ve chosen multifamily properties or a single residence, you can find an institution that is willing to give you a hard money loan.
Similarly, you can purchase a property with the intention of rehabbing it or you can buy one that’s is ready-to-sell. As long as you have the collateral, you likely won’t be turned away by a hard money lender.
Are hard money lenders looking for formal businesses?
If you are investing in real estate as an individual, you will find it a bit more challenging to qualify for a loan from a hard money lender. As these lenders give loans primarily to formal businesses, you’ll have to look for an individual or firm willing to loan to you. If you’d like to make the approval process as hassle-free as possible, it is ideal to go ahead and make your investing into a separate business entity.
Do I need to pick my property before applying?
Yes. Lenders base the loan amount and their final decision on the property you hope to purchase, as well as its value.
While these are just a few of the questions you may have regarding hard money loans, these answers should help you understand your financing options. Keep this guide in mind when you approach a lender about being approved for a hard money loan.