What Is Hard Money Lending?
Hard money loans have increasingly become popular over the years, thanks to the growing real estate market. With hard money lending, you use your real estate property as collateral. In return, you get quick loans that are processed in the shortest time possible, often a couple of days.
Unlike traditional loan products, hard money loans feature high-interest rates and shorter repayment periods. This makes these loans ideal for real estate investors, especially professional house flippers. Below, we’ve discussed everything you need to know about hard money lending.
How Hard Money Lending Works
Hard money loans follow a basic lending principle. Most investors who apply for hard money loans need quick cash to secure a good deal in the market. Others may have a poor credit score hence cannot qualify for a loan in a traditional bank.
Regardless of the reasons, hard money lenders qualify their customers using a set of requirements. More often, it’s best to use a hard money loan to finance an investment rental property or commercial real estate. That way, you won’t lose your primary residence if you fail to repay the loan.
Most private money lenders charge an interest rate of 8% to 15% with a 1 to 3 years repayment period. The amount you qualify with hard money lending depends on a couple of factors. These include the value of property used as collateral, your income, and your real estate experience.
The loan to value ratio for hard money loans ranges from 50% to 75%. This represents the percentage of the total cost that the lender can finance. In other words, you’ll need to put a minimum down payment of 25%.
Hard Money Lending Requirements
Every private lending company will have its own rules for differentiating the best customers from the risky ones. Often, things like credit card history aren’t much of a concern unless there’s competition for the best lending services. That said, here are the most common hard money lending requirements.
- Down payment. A private money lender will only finance your property after you have raised the required down payment.
- Proof of financial stability. Another critical aspect most lenders will consider is financial stability. You’ll need to have enough cash reserves to pay closing fees, HOA fees, insurance, property maintenance, basic utilities, etc. If you can show/prove your other income sources, you will get the best rates.
- Real estate experience. Most private lenders prefer to work with experienced real estate investors who understand the market. The problem with newbie investors is the lack of connections, expertise, and skills in the competitive industry. This is perceived as a risk, and those who qualify for the loan may incur higher rates. If you are working with a hard money lender for the first time, don’t be shy to showcase your real estate experience.
Pros and Cons of Hard Money Lending
Hard money lending is an excellent opportunity for real estate investors to secure great deals and make good money out of it. However, this type of lending also comes with some challenges. Here’s a quick overview of the pros and cons of private money lending.
- Fast processing of loans.
- Minimum lending requirements.
- You can still get a loan with a poor credit score.
- Higher interest rates and shorter repayment periods.
- You could lose your property in case of a default.
To minimize the chances of defaulting on your hard money loan, you should look for a lender with the best rates. Similarly, only use the money to buy a good investment property.
Choosing a Hard Money Lender
When choosing a private money lender, you should keep a couple of factors in mind. The first thing is to look for a lender with the lowest interest rates, as this will determine the cost of the loan. The other things to consider are the lender’s reputation, experience, and customer experience.
You can get to know the best lenders in town by joining a local real estate investment group and asking around for the best lenders with lower rates. After compiling a list of the best lenders, you’ll want to do your own research. Go through the lenders’ website, review sites, and social media pages to learn more about the company’s services, customer relations, etc.
To avoid hard money lending scams, you should be on the lookout for the too-good-to-be-true deals. Any lender promising low rates but charging outrageous upfront fees could be a red flag. So you should only work with the reputed and genuine lenders.
Secure a Hard Money Loan Today
If you are a real estate investor looking for a way to finance your property, a hard money loan could be your ideal option. But before going for the loan, make sure you understand the risks. It’s also advisable to have a contingency plan to repay the loan if the property delays in the market. That said, hard money loans are an excellent tool for any investor who understands the market and is ready to play the game.