Hard money lending is one of the most common financial transactions that has been prevalent for a long time. It is a short-term loan that is secured by real estate which stands as collateral. Private investors fund this type of loan, and it works differently from the ones given by other conventional institutions such as banks and credit unions. Hard money lending includes a term of repayment that is usually around twelve months. However, in some cases, it may be extended for longer. One has to repay the loan in the form of monthly interest, and they must produce the final principal amount at the end of the term.
The industry of hard money lenders has gained a tarnished reputation over the years due to the actions of predatory lenders. However, it is fortunate that at present, hard money lenders pose little risk. While the residual stigma remains, one does not have to worry about losing their hard-earned money. Here are some factors that will aid in obtaining a better understanding of hard money lenders and how one can go about getting a loan from them.
When is hard money lending an option?
When the banks refuse to grant a loan, hard money lenders are a great option. Hard money lenders are primarily driven by the value of the property that the borrower holds. Seldom do they require one to have an exceptional credit score. Thus, borrowers who have sufficient equity in the form of property can seek financing from hard money lenders if they fail to get a loan through conventional methods. Although hard money is not appropriate for every kind of deal, it serves well for situations such as:
- Loans on land
- Loans on construction
- When there is an issue with the credit score of the borrower
- Money fixes
Moreover, in case of an emergency, there are hard money lenders that offer 24/7 service, and this can work well for borrowers who cannot wait for the process of bank formalities.
Factors considered by hard money lenders before approving the loan
It is true that hard money lenders do not have the same stringent requirements as financial institutions. However, there are some essential factors that these lenders consider. It is vital to understand these requirements before contacting a hard money lender:
- Collateral value — The property that will be used to secure the loan is of paramount importance because, in contrast to the functioning of banks, hard money lenders provide a loan based on the value of borrower’s assets. Hard money lenders require an assurance that the amount advanced will be paid in due time. Thus, they seek a clear understanding of the collateral’s value and its future marketability. A reputed hard money lender will prefer that the loan is repaid in time, over the hassle of going through forceful recoup procedures.
- Borrower’s experience — Hard money lenders will be particularly concerned about the borrower’s experience in the market where he/she is planning to invest. They also will seek assurance on whether the borrower will be able to succeed in that field within the loan’s duration. The borrower will have to demonstrate a well-crafted plan that includes a clear exit strategy. However, this does not imply that hard money lenders do not grant loans to novice borrowers.
- Credit — As mentioned above, hard money lenders do not have a rigid requirement for credit score, but a few may still wish to have a look at it. This aids in assessing the levels of risk that the lender may be undertaking. Also, it helps in deciding the interest rate and fees. However, a bad credit score must not deter one from working with a hard money lender as most often, they will grant the borrower a second chance.
Finding the right hard money lender
It is imperative to find the right money lender to serve your monetary needs. Thus, one must begin by undertaking a thorough online search that will throw up a list of hard money lenders. Pick the most relevant ones that are within reach. One can also approach their family and friends for suggestions. This way one can be sure of the hard money lender’s reputation and have a peaceful experience. Even property investors can help with recommendations that could be of great use.
Upon picking the ideal hard money lender, one must consider some factors such as:
- The origination fees that will be charged.
- Amount of transparency in the transaction and whether the lender has other hidden fees which can come up later.
- The service offered by the hard money lender. There must be a smooth process in place to help one through the term of the loan.
- A clear understanding of the terms and conditions attached to the loan.