Starting off in the real estate market can be difficult when you are a new investor. Getting the money necessary to buy properties isn’t always easy to do. FreeandClear states that “Although all the mortgage documents are intended to serve a specific purpose, usually legal or regulatory, the sheer amount of paperwork creates significant difficulties”. Many new investors turn to hard money loans to finance their projects because they are quick and often easier to get than traditional loans. Before applying for a hard money loan, use the following tips to ensure you can make an informed decision.
Find a Reputable Hard Money Lender
The first thing you need to do is find a reputable hard money lender. You need to ask for references from others who have been in the real estate business for a while. Hard money lenders are often individual investors who must be licensed in order to provide loans. You can check the licensing of any lender with the local real estate bureau. You want to be sure you work with reputable lenders to ensure you get the best loan possible.
Ensure You Are a Good Candidate for a Hard Money Loan
The great thing about hard money loans is that you don’t need a stellar credit score to be approved for one. Many people with subpar credit scores are able to get loans based off of the value of the property they are purchasing. The property serves as collateral for the loan. You don’t have to put down a large down payment, but you do have to repay the loan quickly. Many people pay off the loans when they sell the property for a profit. Hard money loans aren’t ideal for people looking to finance their personal home. Because the loans require such a quick repayment time and have high-interest rates, it wouldn’t be financially beneficial to use hard money lenders for the financing of your personal home.
Interest Rates for Hard Money Loans are High
The interest rates that hard money lenders charge for their loans are often higher than the rates of traditional loans of 3.99%. The lenders don’t take a down payment when they get the loan and thus need to make a profit from the loan in some way. The interest payments are high, but they are worth it for many investors. The hard money loans allow them to get the money they need quickly with little hassle.
Fees Are Often Associated with Hard Money Loans
Hard money lenders often charge an origination fee for the loans they offer. The origination fee is a fee that covers the processing of the loan. The fee will be pretty high when you apply for your first few loans. Once you have established a relationship with a lender, this fee often drops over time.
Hard Money Loans Aren’t Long Term Loans
It’s important to determine how long you want to take to pay back the loan before you apply for one. If you are looking to pay back a loan over the course of a few decades, a hard money loan isn’t right for you. Most hard money loans have a strict deadline by which the loan must be repaid. The exact date the loan must be repaid is included in the contract that you sign. Some lenders are negotiable when it comes to the payback date. If you are going to sell the property quickly for a profit, repayment of the loan in a short period of time should be easy.
Failure to Pay the Loan Isn’t an Option
Hard money lenders ensure their investment. They make sure that they will get repaid for the loan that they give you no matter what. When you agree to a hard money loan, you use the property you are buying or another property as collateral. If you fail to pay the loan, the lender can legally take the property from you. This doesn’t happen often because the people who invest in real estate through hard money loans already know that they are going to sell it for profit and repay the loan quickly.
Hard money lenders are often very easy to work with when it comes to real estate investing. They know that buyers need to get money quickly in order to get the jump on other buyers in the market. They work quickly and are able to provide you with large amounts of money in a short period of time. They are a great option for newbie investors who want to get their feet wet in the real estate market.