Every now and then you might find yourself in a tight spot in need of some cash that is not forthcoming. Well, hard money loans might be you savior in such scenarios because they offer short term loans that are secured by property or real estate. These loans are funded by private investors that only require monthly interest payment and a balloon payment at the end of the designated timelines, which can be a few months or even up to five years. These private investors are not necessarily interested in the credit ratings and value rather they are concerned with the property value. Your property determines the amount of money you can get as a loan. The following are some tips of understanding how hard money loans work;
How they Determine the Ratios of Lending
The amount of money a lender is able to give you is determined by LTV (the loan amount divided by the value of the property) they basically lend between 65%-75% of the LTV value of the property. They may also lend money according to ARV (after repair value) which consists of the estimated value of the property after repairs which subsequently creates a riskier loan for the borrower and lender.
Necessities of Hard Money Loans
Most of the times, these loans are best suited for real estate investors because the lenders are able to provide funding faster than the bank. Thus, if you have a stable income and good credit rating, it’s advisable for you to go through the banks or credit lenders. Moreover, if you have experienced short sales or are undergoing foreclosure, you may consider approaching a hard money lender because they may consider the kind of equity you have for a loan. Real estate investors like these loans because in case of a property bidding competition, they can acquire a quick processed loan to push them further up the list of potential bidders.
Interest Rates Associated with Hard Money Loans
Since hard money lending firms are privately owned practices, the interest rates vary from one lender to the other. Wherever they are many lenders, the interest rates tends to decline to accommodate competition. Basically hard money lenders are prone to take up more risk as compared to the normal bank loan procedures. Hence, interest rates for their loans averagely range from 10%- 15% however this may vary depending on the ARV and LTV.
Properties that Hard Money Loans can be Issued
Hard money lenders are not choosy because they can offer loans on multi- family residential homes, commercial and industrial land, and other forms of households. However, because most of the lenders have been in business for long, they might have specific niches of the area of interest which is an important point to clarify before entering into a deal. They mostly might not like owner- occupied residential properties because they might have to undergo added regulations or restrictions.
Process of Acquiring a Suitable Hard Money Lender
It’s important that you conduct ample research before settling on a specific lender. Due to the high volatility of some of these loans, finding the most suitable person for your needs is very important. You can contact your local real estate investor for connections and also attend their club meetings to find out who is who in the business. All these strategies can help you in your search for a competent lender.
Before acquiring any loan, it’s important that you consider the collateral you are putting in line. The hard money lenders are private investors; thus, they are stringent on the guidelines they give you for repayment. Some time ago these people were often feared for swindling people off their properties, but change in real estate policies has brought normalcy to the sector.
However, that does not mean they are not going to move in on your property if you fail to comply with your due diligence. Some of their loans might have high interest rates as compared to banks and other credit firms; thus, they can be quite expensive. Unless you are at your lowest and lack any financing from banking institutions, hard money should be used as a last resort. They offer quick loans which you must have a plan to use them, do not just pick a loan without a specific agenda. Otherwise, you may fail to repay.