Most people aren’t aware that there are ways to bypass the bank when looking for a loan. If investing in fixer-upper properties is in your horizon or you find yourself in need of cash because life situations arise that are out of your control, finding a hard money equity lender may be beneficial to your needs.
What Does Hard Money Equity Mean?
Hard money loans are asset-based loans that are primarily used in real estate transactions. In simple terms, it is a private loan that doesn’t require mounds of paperwork. A borrower receives funds and the loan is secured by real property that is used as collateral. If the borrower defaults, the collateral becomes the lenders.
“These are private investors who, if the interest rate is high enough and the perceived risk is low enough, they will put the money up,” says Pam Strickland, owner of a mortgage consulting service.
It is called “hard money” because borrowers are charged a higher price in both interest rates and orientation fees.
A hard money loan is funded by private investors as opposed to conventional lenders such as banks or credit unions. The terms of hard money loans are usually short; typically, 6 months to 3 years.
Finding Hard Money Loans Tips:
- Find a profitable property. A hard money equity lender will not loan on a property that is going to lose money.
- Partner with someone who is experienced. If you are new to investing, consider partnering with an experienced hard money lender with a portfolio of properties. They can help you get the loan you need and show you how to make the property profitably.
- Cash reserves are a plus. Hard money lenders prefer to work with experienced investors who have a record of being successful. Being a new investor won’t result in an automatic no, but your chances of getting approved will increase if you have substantial cash reserves and collateral.
- Have an exit plan. Most hard money borrowers are flipping properties for profit. Show the lender what you are doing to the property in a very detailed plan and emphasize how much money it will make.
- Keep working on your credit score. While many lenders loan to people with bad credit, you still should try to raise your score. Maintaining a decent credit score will help secure lower interest rates and approval rates for future loans.
Why Use Hard Money Lenders?
Why would someone want to borrow money with a high-interest rate? Hard money loans can be useful for individuals with poor credit, currently unemployed, or need fast cash. According to the Urban Institute, the mortgage denial rate in 2017 was 31% largely due to poor credit. Some of the known advantages to hard money equity are:
- Hard money loans are fast. Hard money loans can be closed in days or in a few weeks. Getting a private money loan closed quickly is very important to borrows seeking to purchase investment properties. You could easily lose the home to another buyer if you don’t act quick.
- Hard money is flexible. Lenders of hard money look at each loan deal individually; they do not use formal underwriting like a bank. Most of these lenders are small companies so there may be more room to negotiate the terms of the agreement.
- Approval can be easier. The collateral you are borrowing on is the most important factor in a hard money loan, especially for borrows with bad credit. If you are purchasing an investment property, lenders will usually only loan out what the property is worth. Many hard money lenders don’t care if you have a foreclosure or bankruptcy on credit; their biggest concern is profitability.
Although the majority of hard money loans fund real estate fix and flip projects, in 2017, Forbes reports that more borrowers are seeking loans for bridge loans (money to cover the gap between two transactions), construction loans, development, land acquisition, and short-term refinancing. Regardless of how the loan is used, this strengthens hard money lending’s noteworthy market share as compared to traditional financing.
Forbes: How The Rise Of Private Lending Is Reshaping The Mortgage Market https://www.forbes.com/sites/forbesrealestatecouncil/2017/12/05/how-the-rise-of-private-lending-is-reshaping-the-mortgage-market/#260f681452ae
SF Gate Home Guides https://homeguides.sfgate.com/hard-money-lenders-2627.html