What’s the first thing that would come to your mind if someone were to ask you: ‘What is hard money loan’?
Also, known as private money loans, the first thought around the concept is usually related to private, shady-looking lenders, who offer instant money against sky-high interest rates. Isn’t it?
What are hard money loans?
As the name suggests, this kind of loan deals with instant cash loan that is generally given to borrowers to finance real estate investments. In some cases, the loan can be acquired to finance other collateral backed loans to save properties invested in the deal.
A hard money loan can sometimes be the only option for any individual in need of money who cannot get a bank loan due to unfavorable credit score. The finance option is usually used as a ‘bridge’ between long-term loans and construction financing.
However, with all those benefits in mind, it is also important to remember that hard money lenders are private lenders and not regulated under any Thrift or Office Supervision or Federal Reserve. Thus, the application process and the way hard money loans work can be very different from the regular bank loans.
The amount borrowers can secure from private lenders through hard money loan is fundamentally based on the worth of the property involved. It could be the property that the borrower already possesses and is using as collateral, or it could be the value of the property the borrower intends to acquire.
At the end of the day, it is the real worth of the property that hard moneylenders are concerned about. They may not consider the credit score of the lender or the current financial standing. This is why most people with low credit score or people who couldn’t secure conventional financial because of a recent short sale or foreclosure often turn to hard money loans.
This is where you can still get a ‘yes’ despite your credit position.
How to secure a hard money loan
As mentioned earlier, you do not need a solid credit score or a strong financial background to secure a hard money loan. The process can be as simple as finding the right lender in your area.
Mentioned ahead are the tips to help you learn how you can get a personal loan without any hassle:
1. Find the right lender
It can be very tempting to save your time and deal with the first lender you find. However, it’s best to take your time and look for a lender who is actually interested in assisting you to finance your real estate opportunity. However, it’s important to steer clear of loan sharks, who are only around to make bigger money.
Conduct detailed research to differentiate between legitimate lenders and scammers.
2. Proof of the potential value of the property you are investing in
Since the finance you secure is based on the collateral value of the property you are investing in, you must be able to prove the value through proper documentation such as detailed construction budgets, architectural plans, and contractor’s quotes for renovations and repairs.
The same rules apply to both residential and commercial projects.
3. A detailed financial plan for the project
Most private moneylenders will offer up to 70 percent of the ARV (after-repair-value) of the property. The remaining cost is your responsibility. If you have the additional cost as cash in hand, the chances of getting loan approval increases.
If you do not even have finances to take care of the remaining 30% of the property’s value, you may not get an approval from a hard money lender. Therefore, make sure you are able to present a clear financial plan.
4. Prepare all the essential documents
Some lenders may require personal financial information in addition to the documents related to the value of the property. Keep essential documents such as bank statements, pay stubs, W-2s, and other important items to present to the lender.
5. Keep in touch with your lender
Since you are the borrower and the one in need, you must show your interest in the loan by staying in constant contact with your lender. Respond to calls and provide them with all the information they require promptly.
The more prompt you are with your response, the better the chances to acquire a loan for your real estate opportunity.
There have been days when some bad apples tried to ruin the hard money lending industry with their illegal ways of providing risky loans to borrowers in need. Fortunately, those days are gone, and we can now rely on the reputable lenders who offer private or hard money loans to people in need.
Hard moneylenders may charge a higher interest rate as compared to banks, but since there are lesser requirements to acquire an instant loan, it’s totally worth it. So, carry out your research and follow these tips to find the best hard money loan deal in your area.