If you are looking for an easy way to borrow money to buy a home, a hard money lender may help you accomplish that goal. Unlike a bank or credit union, there is generally no credit check associated with a hard money loan. Instead, the lending decision is generally made based on the judgement of the lender him or herself.
How Many Loans Will a Person Make?
In most cases, a hard money lender is an individual or small group of people who pool their money together. Therefore, whether a loan gets made or not may depend on how much money that person or group has to give to an applicant. However, there is no set number of notes that a lender is restricted to having out at one time.
Some individuals or groups will choose to have only a few notes outstanding at any given point while others will have hundreds or thousands at once. It is also possible that some will take the interest generated on other loans and use that money to fund additional projects.
Market Conditions May Impact a Loan Decision
If the housing market is going through a period of weakness, a lender may not want to invest in a home flip or rehab project. This is because it may take the borrower longer to sell the house or may limit what the borrower can get from a buyer. In the event that a loan is made, it may come with a higher interest rate or other terms such as demanding points be paid upfront.
These terms may help to shield the lender from some of the risk associated with a possible default. While a hard money loan is secured with the property purchased with the proceeds, it can take time to sell or rent a property. The time it takes to recoup the money lost after a deal defaults could represent a lost opportunity to invest in a more profitable home rehab or flip.
How Long Is the Loan Term?
The longer a person has to repay a loan, the longer a lender has to wait to see his or her capital returned. As a general rule, those who allow for loan periods of longer than a year will make fewer loans than those who allow for loan periods of several months. Typically, a hard money lender will ask for his or her money back in about six to 12 months.
Personal Preference May Come Into Play
For most hard money lenders, providing financing to rehab or flip a home is seen as a way to earn large returns on capital in a short period of time. However, many hard money lenders realize that there is a lot of risk involved as well. Therefore, they may be choosy as to who they lend to or what projects that they are willing to finance. For example, some may only want to finance projects involving multifamily homes or homes in a neighborhood where price growth meets a predetermined target.
Does a Lender Work Nationally or Locally?
Lenders that work nationally may make more loans than those that lend to local borrowers only. This is because there is a larger pool of borrowers in the entire United States than there would be in one specific area. Generally speaking, those who seek out borrowers in all 50 states may be motivated to make deals wherever they make sense. This may provide an opportunity for borrowers who don’t want to work with local lenders or can’t come to terms with them.
What Does the Law Say?
Most states have usury laws that limit how much interest can be charged on a loan product. There may also be loan paperwork and other regulations that lenders have to contend with once they get to a certain number of notes outstanding. Those who don’t want to deal with a lot of paperwork or red tape may only choose to lend small amounts of money to a few people at a time.
Those who are looking to flip or rehab a home may not want to get a traditional mortgage. In some cases, they may not qualify for one. The good news is that hard money lenders generally ignore a person’s credit and focus instead on the potential value of the home after it has been fixed up. However, borrowers may need to investigate several different lenders to find one that fits their needs and budget.