If you’ve talked with several banks and credit unions and still can’t find a lender, you may be almost ready to give up on the idea of financing you real estate investment. These days, mortgage loans can be hard to find, and they tend to go to the borrowers with the best credit ratings.
Before you relinquish your real estate dreams, you may want to consider another type of financing.
Hard Money Financing Can Help with Real Estate Investments
Hard money loans are significantly different from traditional mortgage loans. First, hard money loans are entirely based on the value of the asset you’re purchasing. Your credit score doesn’t matter, because if you walk away from your mortgage, the lender will simply foreclose upon the property to get his or her money back.
Hard money loans are a risky proposition for a lender in today’s rapidly shifting real estate market. Banks and credit unions avoid these types of investment. Only private lenders provide hard money loans. To offset some of the risks they are taking, they charge high interest rates for the loan, usually anywhere from 12% to 20%. They also generally request a down payment of 30% to 40% of the property’s value.
Finally, hard money loans are short term loans, designed to get borrowers through a period of cash crisis or a period of transition.
Great Times to Use Hard Money Mortgage Loans
There are a few situations when hard money loans seem tailor-made to address your problems.
If you are in the business of flipping houses, for instance, most lenders will agree to loan you a percentage of what they anticipate the property value will be after renovation rather than what the property value actually is at the moment. This can help you avoid the high down payment mentioned earlier and sometimes even start you off with some of the money you need for repairs. Since you plan to renovate the property, sell it, and repay the loan before it comes due, you and the lender will both benefit from your investment.
Another excellent time to look into hard money loans is when you need a “bridge” loan. We live in a highly mobile society, and your job may require you to transfer from one location to another with very little warning. Ideally, you will sell your old house and use the proceeds to obtain a new one, but it doesn’t always work out that way. Sometimes, you find the new house of your dreams before the sale of the old house goes through. A hard money loan will enable you to acquire the new house and pay the mortgage off when the old house does sell.
Exit Strategies
Whenever you are dealing with hard money, it’s important to develop an exit strategy or a way to get clear of the loan when it reaches the end of its life. Most people either plan to sell the property before their loan term is over, or they plan on improving their credit scores enough to qualify for a traditional refinancing loan.
Hard Money Loan Process to Secure the Necessary Funds
A hard money loan is an asset-based loan that takes into account only the collateral offered. In real estate, the collateral is the value of the home you are purchasing. If you decide to seek a hard money loan instead of one of the traditional mortgage loans, take the following steps.
Consider the Amount of the Loan
Traditionally, hard-money loans cover only about 70% of the fair market value of the home. This means that you have to raise a down payment of at least 30%. The one exception is if you are planning to buy a distressed property, fix it up, and then sell it. In this case, you may be able to convince the lender to loan you 70% of the expected value of the home after refurbishment (ARV), which usually means you put no money down.
Find a Reputable Lender
Banks and other public institutions that issue mortgage loans do not supply hard-money loans. These loans usually come from an individual or privately-owned company who are willing to take a considerable financial risk to turn a handsome profit. You can find these private lenders through mortgage brokers, real estate investing clubs, and word of mouth. You can also look on the Internet, but it’s important to remember that many scams co-exist with genuine offers. Proceed with care.
Make Contact with Lender
Approach the lender with your proposal. Be ready to tell them the address of the property you want to buy, why you are seeking a hard-money loan instead of one of the more traditional mortgage loans, and what your plans are for the property. Since hard-money loans are short-term loans, generally lasting no more than a few months to three years, it’s also important to have an exit strategy in mind.
Work with a Local Lender
If you’re working with a national hard-money lender, he or she will probably want to run a credit check on you and look at your income profile, just as a bank would do. A local lender, on the other hand, will be more interested in the property you are buying and its fair market value or after refurbishment value. Some lenders want a home inspection to determine these numbers, but several have the experience and knowledge to take a look at the home themselves and get a feel for the figures. Working with a local lender usually makes the loan process go more quickly.
What to Expect From Your Loan
Your hard-money loan will probably have several features. First, as discussed above, it will be a short-term loan that will come due in a few months or years. Second, you can expect to pay a very high interest rate, usually 12% to 20% per year. Finally, hard-money loans all have very strict terms. If you do not abide by the terms exactly as they are laid out, the lender can foreclose upon your property.
A hard-money loan may seem like an easy way to get credit, especially if your credit score or your income is low. Before seeking a hard money loan, though, make sure you understand and can abide by the terms of the loan. You certainly don’t want to lose your property to foreclosure.
Finding a Reputable Hard Money Lender
Hard money loans are short-term, asset-based loans that take into account only the value of the property being purchased. Unlike traditional mortgage loans, hard money lenders do not care about your credit history, income, or ability to repay the loan from personal funds. These types of loans are often last-resort loans for borrowers in financial trouble who are trying to avoid foreclosure. Because of the high risk hard money lenders face of losing their investments, banks and other public financial institutions do not extend hard money loans. Most lenders are wealthy individuals or privately owned companies looking to make a quick profit. Finding the reputable lenders can be a challenge. These tips will give you a place to start.
Talk to Mortgage Brokers
Mortgage brokers are familiar with the hard money lenders in your area. They know who has been in business for a while, and who has the reputation of being fair and knowledgeable. A mortgage broker is probably your best starting point.
Search Online for Hard Money Mortgage Loans
Many companies that provide hard money loans advertise their services online. Since it is hard to be certain of the quality of such lenders, it’s a good idea to deal with a local individual or company instead of a national company. Ask the lender for references, and before signing any paperwork, check with the Better Business Bureau for complaints.
Check with a Local Real Estate Investing Club
Most cities have real estate investing clubs that attract all kinds of people interested in the real estate market, including lenders who provide hard money loans. Attend a few club meetings and do some networking so you know who the main players are. Again, it’s a good idea to ask for references and to check with the Better Business Bureau before making any final decisions.
Ask People You Know
with the housing market in crisis, you may very well know someone – a friend, family member, or co-worker – who has had to find a hard money loan to rescue his or her home from foreclosure. Ask that person who provided their loan and whether they would recommend the lender. Talking to acquaintances is helpful, because in addition to finding out which lenders to use, you can also learn about which lenders to avoid.
Check the County Recorder’s Office
Look at the public records for the names of individuals who hold mortgages but who are not the seller or obviously related to the seller of the property. If you find an individual who holds several mortgage loans, you’ve probably found a hard money lender. Contact the person for additional information about his or her services.
A hard money loan may be just what you need to save your home and give yourself a little time and space to get back on your feet financially. Ask around before selecting a lender and make sure you choose someone who is ethical and experienced.