If you have been considering using a hard money loan for an upcoming real estate investment, chances are you may have a number of questions about this lending option and what it entails. Although they have been around for some time, hard money loans are not as well-known as traditional mortgages, which is why many people tend to have questions about these loans and what they mean.
Hard money loans, often also called “private loans” and they are designed to help people get financing when traditional loans won’t work or aren’t the best option. With this in mind, it is also important to understand that hard money loans require a slightly different approach than getting a loan from a bank. With this in mind, here are a few tips that can help you as you navigate the world of hard money lending.
- Educate yourself. Most people don’t know a great deal about hard money loans. This is why the first thing you should do is to read up on these loans and what they really entail. There are many great blogs and resources on hard money loans that you can turn to before you ever meet with a lender.
- Make sure you get everything in writing. Hard money loans are not like mortgages and they aren’t governed in the same way traditional mortgages are. This is why it is so important that you get everything in writing and are fully aware of all of the different fees that may be associated with your loan. This includes upfront fees.
- Be as liquid as possible. If you really want to make sure your hard money loan goes through, you want to be as liquid as possible. If you have minimal funds, then consider partnering with someone who has more money in the bank. The good news is, hard money lenders can fund a majority of the cost of most investments, so you may not need as much money as you originally thought.
- Be prepared for different interest rates and shorter loan terms. While it has already been emphasized, it is important to touch on the fact that hard money loans are not mortgages, so don’t go into the process expecting mortgage interest rates or mortgage loan lengths. Typically, since hard money loans are so much more flexible, they have higher interest rates. They also are designed for quick investments, so they typically have shorter terms, and rarely exceed two years.
- Know what LTV means. LTV or Loan to Value, is extremely important when it comes to hard money loans. Say you are going to flip a home and you plan on buying it for $100,000 and it needs $50,000 in renovations. The total loan will be $150,000. You need to show that the home will have an appraisal value that is worth the risk. So, if the projected value of the rehabbed home is $300,000, your lender is likely going to approve you, for having a good loan to value ratio. If the projected value is $150,000, you may have trouble getting approved.
A hard money loan is a great option for many investors and many people looking for non-traditional financing. Keep these tips in mind before you meet with a hard money lender so you can have the greatest chance for success.