If you are an investor and you want to start using hard money loans, you may feel like a fish out of water. It is very important that you research your options before choosing a hard money lender so that you get the best deal possible. During your research, you may come across a number of terms that you may not understand. The following looks at some of the most commonly used jargon in the industry.
1. Loan to Value
The loan to value ratio is something that is of importance in all types of loans.
The loan-to-value ratio (LTV ratio) is a lending risk assessment ratio that financial institutions and others lenders examine before approving a mortgage.
The higher the LTV, the greater the risk, meaning you may have to supply additional collateral.
2. Lien Position
If your investment fails and has to be liquidated, the lender wants to know where in the chain they are in terms of repayments. Ideally, they want the 1st lien position, which means that they have top priority. They may, however, agree to 2nd position as well.
3. Loan Parameters
The loan parameters are basically the acceptance criteria that the lender has put in place.
The factors used to determine whether or not to provide a loan to the borrower.
These parameters tend to be very different with hard money lenders than what they are with traditional financial institutions. Often, they will look at things such as your existing debts, your current credit score, and the type of collateral that you have to offer. Hard money lenders are private lenders, either individuals or groups of individuals, which means that they can set their own loan parameters as they see fit. Banks, by contrast, have virtually the same parameters across the board.
4. Bridge Loan
A bridge loan is a short term solution that covers the financial gap between two transactions. If you were to purchase a home and your old home hasn’t been sold yet, the bridge loan can cover those costs.
5. Rehab Loan
A rehab loan is an investment loan on properties in a state of disrepair. Generally speaking, traditional banks are not interested in providing rehab loans, which is why a hard money loan may be required. That is because private lenders are willing to look at the potential of a property, whereas traditional banks are only interested in what the property is currently worth. Rehab loans are heavily regulated if they are provided by the Federal Housing Administration (FHA).
The rules for an FHA 203(k) Rehab loan include restrictions on the type of property that can be rehabbed under this program, as well as requirements for the condition of properties that are eligible for the 203(k). Those restrictions include the number of units the property has–eligible homes may have one unit but no more than four, and the dwelling must have been completed for at least one year, according to FHA.gov.
6. Commercial Loans
These loans are used for equipment upgrades, new product lines, repairs, expansions, and so on. Banks generally don’t want to offer these because of the uncertainty of getting their money back, which is why private lenders often step in to fill the gap.
7. Construction Loans
These loans are offered to those who want to build a residential or commercial building. Banks are generally not interested in these properties because there is no proof of viability of the project. Hard money lenders, on the other hand, are willing to invest in these.
If you want to invest using private money, then understanding the above terms is very important because it will help you choose the most appropriate solution. Remember that hard money lenders want to make a profit, which means you must show them that you are an investment worth making and a risk worth taking.