In some situations, a real estate investor may need money as fast as possible to finalize the purchase of a prime piece of property. Whether this is due to not qualifying for a traditional mortgage or simply because they are trying to keep other investors from beating them to the property, it may appear there are few options available. However, for many investors, this means using a hard money loan. Quite different from a regular mortgage, hard money loans offer large amounts of money in days instead of weeks. Along with this, they also provide the flexibility investors seek when pursuing various investment projects. But while having these benefits, these loans also come with higher interest rates, fees, and short payback periods. Therefore, before choosing to take a hard money loan, it is best to be aware of a variety of details.
Since this is a loan, the investor will need to have collateral as they would at a bank. However, with hard money loans, the property being purchased serves as the collateral, and is key in determining how much money the investor can get. To make this determination, the lender will look at two main aspects of the property, these being the loan-to-value ratio and after-repair-value ratio. Based on how they view these two aspects of the property, the lender will lend an amount equivalent to a large percentage of the value, often 80-90 percent. Thus, if the property is valued at $100,000, the investor will be granted a loan of up to $90,000.
Once an investor is granted a hard money loan, the pressure will be on to be sure it can be paid back in a much shorter period of time than a traditional mortgage. This is because instead of having up to 30 years to pay off the loan, the investor will probably have no more than three years to pay off their hard money loan, and in most cases the payback period will be only 12 months. Because of this, it is always recommended the investor have a sound financial plan in place to ensure their property sells within this time. If for any reason it does not, they may be forced to refinance their loan at a much higher interest rate, incur additional fees, or possibly face foreclosure from the lender.
Application and Approval
While there are drawbacks to hard money loans such as the short payback period and higher interest rates, one of the biggest benefits is the easy application and approval process. Since the lender will either have their loan paid off or be able to assume ownership of the property, they do not have to worry about the investor’s ability to repay the loan. Thus, they rarely if ever check the investor’s past financial history, which may include bad credit or bankruptcies. Along with this, rather than wait weeks for their loan application to be approved, investors working with hard money loan lenders will often have their applications approved in less than one week, allowing them to have cash in hand much sooner than with traditional loans.
Finding a Reputable Lender
Unlike banks that must follow strict lending regulations, hard money loan lenders have few regulations that they must follow. Because of this, it is very important for investors to make sure they are dealing with a reputable lender when pursuing a loan. To make sure a reputable lender is selected, an investor should ask other investors they know to point them in the direction of a reputable lender, which will be either a private institution or individual. By asking other investors or real estate professionals in their area, there should be little problem finding a reputable lender with whom to do business.