Qualifying Hard Money Lenders

Qualifying Hard Money Lenders

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.

3 Reasons to Use Hard Money Lenders

3 Reasons to Use Hard Money Lenders

Hard money lenders are private people or companies that use their own money or lines of credit to finance real estate. These lenders are often familiar with real estate. They have often built lending companies as well as purchased, sold and exchanged many forms of real estate throughout their business life. Because of a hard money lenders extended knowledge their prices, interest and other costs are set. Their interest rates usually run about 10-18% with additional costs (called points) around 3-8% of the loan amount being lent to you. These large costs may deter first time and new investors from using hard money lenders for their real estate investing businesses. However, here are three large reasons you should consider using hard money financing in your own real estate investing businesses:

  1. Cash Financing

    You have likely heard “cash is king”. In no other business is this truer than in real estate.

    Think: if you were selling a house and you received two offers. One was cash and the other was traditional financing. With all other items being equal you would be more likely to accept the cash offer. Cash gives strength and power to your offers. Hard money financing is often considered as “cash” financing and gives you the same strength, power and value as actual cash.

  2. Speed

    One of the similarities and benefits of cash and hard money financing is the speed.

    If you were at a grocery store to purchase a candy bar and purchased the treat with cash it would only take you minutes to purchase the candy. Similarly, real estate purchased with cash or hard money financing can be completed very quickly. Unlike the candy bar real estate purchases have a need to clear title. However, after a cleared title real estate transactions can be completed in days. This speed can also give large strength to your offers.

  3. Easy qualifying

    Hard money lenders do not have the same lending requirements as a bank. As you may know or have experienced: banks often require down payments, good credit scores, years on a job and sizable bank statements. This is not likely the case for hard money lenders; instead, their evaluations are usually on the property and the equity you are purchasing as a part of their property review rather than on you.

    Easy qualifying allows more investors like you and I to purchase.

Reading these easy steps, you can see the value of the financing offered by hard money lenders. To add to the benefits of these types of lenders if you know their costs you can deduct the costs from your offer formulas so that there is little to no change to the profits you could make in real estate transactions. Consider using hard money lenders to finance your next real estate transactions.