There would be instances when a real estate property owner or investor would find himself hard pressed for cash and time to finance his investment. As opposed to going to the banks to apply for a much needed loan, some would-be borrowers go to a hard money lender. For whatever reasons real estate investors can choose to go to hard money lenders for a loan. One big attraction to these lenders is how quickly you will be able to get the loan.
Requirements for Hard Money Loans
Hard money loans are considered as mortgage loan since the lender will be using a real estate asset as the collateral for the loan. The amount of money the borrower will be able to get is primarily based on the value of the property itself and not on the credit standing of the borrower. However, it is wise to take note that hard money loans are short term loans and are usually expensive compared to bank financing. The interest rates for this type of funding varies – ranging from 10-18% with additional charges called points. It is often that hard money lenders charge 3-8 points (points are an percentage of the loaned amount. For example: $100,000 loan charged 3 points or 3% would be $3,000). Although the higher interest rates would seem to be scary for first time borrowers, seasoned investors are less daunted by it. They would simply reason out that the benefits of being able to get the much needed financing quickly outweighs the higher cost it entails.
Qualifying the Lender
Not all lenders are created equally. Also, not all lenders lend the same. Unlike traditional bank financing that have similar interest rates, similar costs and similar qualification methods hard money lenders are quite different. Think of it this way: Lender 1 is your neighbour and Lender 2 is an unfamiliar person from a real estate investment club you attend. They will both lend differently and will charge you different interest rates while also having different lending requirements.
Get to know the Lender
The absolute best thing you can do is to determine how the lender will do business. A ten-minute conversation can give you great insight into how they will lend to you and what their requirements would be.
Questions to Ask
Here are a series of questions that will help you understand what the lenders will consider. However, before you go running and calling the lenders keep in mind most lenders are not asked this many question so they may But, these questions will also show that you know what you are doing better than most the lenders may speak with.
- What are their points?
- Can points be charged at the end of a loan?
- What interest rate do they charge?
- What is their LTV?
- Will they lend the LTV upon the value or purchase?
- Will they fund repairs?
- Can you pull cash out of a loan?
- Do they lend in residential financing?
- Do they lend in commercial real estate?
- Do they have a pre-payment penalty?
- Do they offer a Proof-of-Funds?
- Do they check credit?
- Do they look at the property more than you?
- Do they have an application fee?
Hard money lenders are widely used in real estate but when you use them think: “Are they good enough to work with me?” This will help you understand the purpose of qualifying the lender and find the best funding for you and your business.