Basics of Hard Money Lending: A-to-Z Guide for Real Estate Beginners
Considering taking out a hard money loan to purchase a new property but doubting the right choice? Indeed, you should advise by a qualified legal, financial, or investment expert before making financial decisions. However, if you are a real estate beginner, go over the basic information about the hard money loan to get a general idea about it to get started.
Hard Money Loan and Lenders
What is the first thing that comes to your mind when mentioning a hard money loan? Well, you probably recall cases of lenders with dubious reputations who ran businesses in dark alleys and charged exorbitant interest rates. In previous years, some private lending companies have tainted the hard money lending industry by making risky loans to borrowers, using real estate as collateral, and intending to foreclose on that property. Fortunately, today’s real estate market has gotten rid of such trickers, and only reputable hard money lenders, represented by either a private group of individuals or investors, remain a priority. They offer borrowers hard money loans, also known as ‘short-term loans’ or ‘private financing’ secured by real estate.
A hard money loan is used chiefly for short-term real estate investing projects, for instance, to meet a specific project, such as a renovation project, before flipping property. Typically the funding term is 12, 24, or 36 (maximum period) months, and sometimes you can refinance as early as six months. The main factor in approving a hard money loan and obtaining financing from a lender is having sufficient equity in the borrower’s property, used as collateral and the project’s feasibility, not the investor credit history as a conventional loan requires. Under the hard money loan contract, the borrower must pay the monthly payments and interest set out in the agreement with the total loan amount by the end of the term.
Types of Properties and Deals Appropriate for Hard Money Funding
When reaching out to a private lender, ask what kind of loans the company is willing and able to make. Specializing in hard money loans, a lender can finance almost any property, whether single- and multi-family homes, commercial, land, or industrial properties, as long as the borrower has sufficient property equity used as collateral.
A hard money loan is the best way of funding when you need financing for a fast deal. The hard money borrowers can access funds much quicker than borrowers with conventional funding as a bank loan involves a long approval period. Consequently, a real estate seller usually prefers a hard money buyer over a traditional mortgage.
The hard money loans are outstanding for the following cases:
– Fix and Flips
– Land loans
– Construction loans
– Commercial & industrial properties
– Bank declines
– For the buyers with credit issues
– For the real estate investor who needs to act quickly
Interest Rates and Points for Hard Money Loans
An open secret is that the hard money loan interest rates and points are higher than conventional ones. It’s due to the lender, the perceived risk of the loan, and the loan-to-value ratio. Consider the region where the lender operates. As a model, the hard money lenders in California decrease rates and points, unlike other US lenders. The reason is the increased competition in the region, and each lender tries to avoid losing a client.
As mentioned above, hard money lenders charge high-interest rates to mitigate the risks. The hard money loan interest rates range from about 8% to 15%, while the percentage points can range from 2% to 6% of the total amount loaned. Even though interest rates for hard money loans are typically high, one can lower the interest rate by increasing his down payment, improving his credit score, or paying off multiple loans with a hard money lender.
Standard Requirements for the Borrower
Any real estate beginner wonders what the short-term loan’s requirements are. Versus traditional bank loans, there are very few:
1. Equity and down payment. As private financing is asset-based, the lender is concerned with the value of the property and the borrower’s equity – the larger the borrower’s equity, the safer loan for the lender. The down payment is 25-30% for residential properties and 30-40% for commercial properties.
2. Financial strength. The borrower must be financially strong enough and have sufficient funds to pay the monthly loan payments and other obligations.
3. Exit Strategy. The borrower must present a reasonable loan repayment plan to the hard money lender to prevent defaulting on the loan.
4. Prior experience. A borrower’s background in real estate is welcome to get financing. It is easier to obtain a loan for an investor with a more significant investment experience than a borrower trying to finance his first fix-it project.
Once a potential borrower proves that he can meet all the lender’s requirements, he will receive quick approval and funds from the private lender.
Experienced Hard Money Lender to Work With
Lending Bee Inc. is the trusted source for hard money lending in California, providing clients with immediate financing to pursue their real estate transactions. Our hard money loans are hassle-free alternatives to conventional loans with simple guidelines, flexible terms, and faster approval processes. Contact our experienced team of experts to be navigated the hard money loan process via FB, IG, or WhatsApp, or call at 323-448-3956.