One factor that has always appealed to borrowers about hard money loans is the fact that the approval process usually goes much more quickly than it does when applying for traditional mortgage loans.
This is because many private lenders don’t bother to check your credit score or income – they are much more interested in the value of the house you are purchasing. This makes sense because the home you purchase will serve as the collateral for your loan.
If you are seeking a hard money loan, you can expect to go through the following steps.
Talk to a mortgage broker, a real estate financing club, a financial advisor, or a trusted friend or family member for a referral to a private lender. Working with someone locally is best because national lenders tend to perform credit and income checks as if they were dealing with regular mortgage loans.
Complete a Loan Application and Statement of Information
The loan application will vary from lender to lender. The Statement of Information allows the lender to review title information to make sure there are no tax liens, judgments, or other encumbrances against the property.
Present a Plan
A hard money loan is a temporary fix at best. The balance of the loan usually comes due within a few months to a few years. Therefore, it is important to know what steps you will take to improve your situation before the loan comes due. For instance, you may be planning to sell the house as it is, to refurbish it and then sell it, or to build up your credit score and seek traditional financing at the end of the hard money loan. Lenders need to know this information to make sure you are a good risk.
Review Property Values
Some lenders insist on a home inspection to determine the value of the property, or, if you are planning to flip the property, the value of the property after refurbishment. Other private lenders are so experienced that they simply stop by to look at the house for themselves before making a decision about value.
Check Credit Scores – Sometimes
Some private lenders, especially national companies, will run your credit score and use the information they receive to help them decide whether or not to issue your loan. Most local private lenders do not bother with a credit report, counting on the collateral to help them recoup their losses if you default on your loan.
If all goes well, you will be approved for a loan. Typically, the amount of the loan is between 60% and 70% of the fair market value of the property. If you are planning to flip the home, you may be approved for 70% of the value after refurbishment.
Hard money loans tend to have very strict terms and regulations. Be sure you are familiar with the private money lender’s requirements and that you are in compliance with all the terms of the loan. Failure to follow rules could result in heavy penalties or foreclosure.
What to Look for in a Hard Money Lender
Make no mistake about it – hard money lenders generally offer terms that are more in their favor rather than the borrower. But if you need to resort to a hard money loan, for instance, if you’re looking to flip a house, there are ways to ensure that both you and the lender get a fair deal. When you speak to lenders, ask yourself the following questions.
What is the Loan to Value (LTV) Ratio?
Most hard money loans have LTVs of no more than 70%. That is, if you’re buying a home valued at $100,000, you can get a loan for $70,000. However, if you’re planning to refurbish the home before selling it, see if you can get the lender to loan you 70% of the fair market value AFTER restoration. For instance, if you are buying a distressed property currently valued at $50,000, you would typically qualify for a loan of $35,000. If, however, you can show that once you restore the property it will be worth $100,000, you may be able to talk the lender into loaning you $70,000 based on the property’s potential. A lender who is willing to be flexible on this issue is a lender you want to work with.
What Interest Rate is the Lender Offering?
Hard money loans usually carry very high-interest rates. Anything from 12% to 20% per year is standard. If the lender you are approaching cites an interest rate higher than 20%, however, he or she is probably not someone to do business with.
How Long is the Loan Term?
Hard money lenders specialize in short-term loans that last from a few months to a maximum of about three years. Even if you are planning to flip the house quickly, negotiate with the lender to get the longest loan term possible. In today’s market, there is no guarantee of being able to sell a piece of property, even a beautifully refurbished one, and it may take you longer to find a qualified buyer than you think it will. The longer the loan term, the better.
Is There a Penalty for Paying Early?
Some hard money lenders are willing to issue you a loan with a very reasonable term, but then penalize you if you pay the loan off before the term is over. Flipping property is an uncertain business at best. You might find a great buyer immediately, or it might take you months or years. Just in case the perfect buyer comes along quickly, make sure the lender will allow you to pay off your loan early without penalty fees.
Does the Lender Perform Credit History Evaluation or Income Verification?
If you’re working with a national company, you will probably have to go through a credit and income check as if you were applying for a traditional mortgage loan. If your lender is local, however, he or she may be satisfied with a quick look at the property and perhaps an evaluation to determine its fair market value. This means that your loan may be approved in hours or a day or two instead of weeks. Whenever possible, look for a local lender who is willing to strike a deal with you as soon as a piece of property that you want becomes available.