To get a good insight into the workings of a hard money loan including the dangers and benefits that are so associated, take a look at these:
- What hard money loans are all about?
- What types of properties and deals are hard money loans good for?
- What kind of interest rates and loan-to-value ratios are involved?
- What are the standard requirements of the borrower?
- Where can one find an experienced hard money lender to work with?
What are hard money loans all about?
Hard money loans are short-term loans that are secured by a real estate property. They are given by private investors who go by the name hard money lenders like those at www.newsilver.com/hard-money-lending/massachusetts/ for a short time. Unlike traditional loans, hard money loans are quick to get and that’s the beauty.
The agreement terms are usually to last for 12 months, although the loan term can still be extended to over 4 years. It usually requires payments of interest on a monthly basis throughout the loan duration and paying the principal at the end of the term.
What Types of Properties And Deals Are Hard Money Loans Good For?
Hard money loans are taken for short-term loans and rely on collateral rather than on the financial status of an applicant. The terms of hard money loans are not fixed and are based on negotiations between the lender and the borrower.
The terms of hard money loans are strictly based on the value of the property being used as collateral and are often taken by property flippers who would want to renovate and resell the real estate property that has been given as collateral for the finance. This quick loan process should normally not exceed a year — the interest rates can be killing.
The high cost of a hard money loan is partly overlooked by the borrower since he intends to pay it off quickly and considering the fact that it is much faster to get a hard money loan than to wait eternally for a bank loan.
For projects that require fast access to cash, hard money loans have very few and less stringent approval processes as well as greater flexibility in the repayment making the borrower easily meet up with a deadline.
Hard money loans are also used by borrowers with poor credit records but who have considerable equity value in their property. It is used in turnaround situations and for short-lived financing purposes.
What Kind of Interest Rates and Loan to Value Ratios Are Involved?
The points and interest rates charged by hard money lenders are peculiar to the lender and the region. Places with a higher prevalence of hard money lending firms like New York generally have lower rates than places like Wisconsin with a lower presence of hard money lenders.
The difference in interest rates is of course a function of the presence of competition. More competition means a lower price.
The higher risk nature of hard money loans is responsible for the higher interest rates which are somewhere between 9 – 17% depending on the lender and the risk of the loan.
Points on the other hand can go anywhere from 3 – 5% of the total loan. The interest rates and points are also dependent on the loan-to-value ratio.
Talking about the loan to value ratio, the loan amount the hard money lender is willing and able to give is based on the ratio of the loan amount to the value of the property. This is what is referred to as Loan to Value (LTV). Numerous hard money lenders usually lend up to 70 – 85% of the actual value of the property.
Sometimes, lenders can also lend according to the after repair value (ARV) of the property.
This is the estimated value of the property after the borrower has worked on its renovation. This kind of lending creates a greater risk to the hard money lender because the amount of capital put in by the lender surpasses what the borrower may have to commit to the repair. However, the lender is compensated for this kind of loan with the collection of much higher interest.
What Are The Standard Requirements of The Borrower?
Hard money lenders are only interested in the amount of equity the borrower has put in his property that can be used as collateral. They aren’t concerned with the borrower’s credit status.
The borrower also needs to present a reasonable plan that shows how they would pay off the loan. They are actually needed to state how they want to improve the property and sell it.
Finding a Hard Money Lender to Work With
Apart from the online option of searching by typing [your location] + “hard money lenders”, you can attend local real estate investor club meetings where a good number of hard money lenders looking to relate with borrowers are often in attendance.
You can also reach out to real estate brokers, conventional mortgage brokers, and other real estate professionals to refer to an experienced hard money lender.
With this information well absorbed, you are sure to be well prepared and educated enough to get that hard money loan. Go ahead.
