Investors have more options than ever when it comes to investing in properties. These property loans are considered to be among the easiest ways to secure funding for an investment or rehab property. Lenders specializing in hard money loans for real estate investors should be consulted.
What is a hard money loan?
A hard money loan is issued to investors and carries fewer requirements than other types of loans. The loans are secured by an asset. The funding for the loan must be pursued by a corporate entity in some cases. The approval process for taking out such a loan is quicker than a traditional loan. These loans are usually funded more quickly than conventional loans and are awarded based on the profitability of the property. Hard money lenders don’t focus on your ability to repay the loan so much as the asset, which they plan to sell if you are unable to repay the loan. After a year or two, you may be required to pay what is called a balloon payment.
Understanding the difference between the hard money loan and soft money loan
Soft money loans offer loans with lower interest rates than hard money loans. Hard money loans are considered to be short-term loans, featuring a repayment period between 5 and 15 years. There are some hard money loans that should be repaid within several months. The points for a traditional loan is usually several points lower than those assigned to a hard money loan. For residential properties, the borrower may require that there be up to 30 percent equity in the property. In a traditional loan, cash reserves may be evaluated. When there is a hard money loan, you will have to have considerable cash on reserves to qualify for the loan. Hard money and soft money loans for properties are still subject foreclosure if unable to repay. Interest rates for hard money loans fall between 12 and 18 percent.
Are there hard money lenders that don’t check credit?
While it’s true that they don’t look at your credit score as the sole determining factor of your creditworthiness, they still look at your credit. They work with people with lower credit scores, but they view your ability to repay in a different light. When lenders pull your credit for hard money loan, they are looking for a history of foreclosures, charge offs, bankruptcies, and collections.
In what scenarios would a hard money loan make sense?
Hard money loans are ideal for investors. They are typically pursued for construction projects. It isn’t uncommon for an investor to take a loan out for a property that will be rehabbed and quickly sold. There are even loans issued solely for the purpose of acquiring land. Hard money loans are a quick option for property investors in a bind. A property investor with less than perfect credit may find luck with a hard money loan.
What determines how much I’m offered for a loan?
The loan amount is determined by the value of the property. You can be eligible for up to 80 percent of the property’s aftermarket value. You are rarely able to get a loan that covers the entire amount of the loan.
How does my lender make money on this type of loan?
There are three main ways a lender makes money on a hard money loan. The interest rate is usually higher for a hard money loan, so there is income from this type of loan. Lenders also make money off the points income. A hard money loan’s point value also produces income opportunities for the borrower. For example, one point would equate to 1 percent of the loan amount. Hard money loans tend to carry more points than other types of loans. By assessing more points to a loan, they earn additional income. Fees associated with the loan also provide additional income for the lender. Underwriting fees provide another opportunity for income for businesses.
Do I need to set up a company?
According to Delancey Street, hard money lenders prefer to work with other corporations. They often view corporations as more credible than individual borrowers. Setting up an LLC or corporate entity to manage hard money loans is recommended. It shields assets from claims and gives the lender greater confidence. Consider working with a real estate attorney to discuss your business options.
Hard money loans are collateral loans. They are easier to qualify for and are usually short-term loans. While the requirements may be fewer, cash reserves and equity requirements are more difficult to meet with hard money loans. Hard money loans are designed for experienced or professional property investors.