When going into real estate investing you will often need to rely on obtaining a hard money loan in order to obtain a piece of property or to rehab a property. These loans are secured by putting up a piece of property as collateral for the loan. This loan will act as a bridge loan until the property is sold or a more permanent loan can be obtained.
When going to get a hard money loan there are certain things you will need to ask your lender before you sign on the dotted line and we are going to go over them in this article.
Normally hard money lenders will only specialize in specific types of properties. So, when you start looking for a lender, you need to make sure to find one that deals with the property you plan on obtaining. Make sure you always ask upfront if they handle the property you are purchasing.
Hard Money Lending Compared to Traditional Lending
Compared to banks, hard money lending is the way real estate investors tend to go because they have the ability to fund the loans quicker. With a bank it typically takes a month or more to close on a mortgage where, with a hard money loan they can normally close in a week or less.
The faster turnaround with a hard money loan is an easy sell to real estate investors because this will give them cash in hand to greet the seller with. Especially on a property that has multiple bids on it. This could give you the edge you need to land the deal because at the end of the day all the seller is concerned about is getting their money. So, when looking for a lender be sure to ask them how quick they can close on a loan for you.
With a hard money loan, the interest rates will always be higher than let’s say a typical bank mortgage because the lender is assuming greater risk. Rates will very from city to city. Larger cities will have lower interest rates compared to smaller cities. This is because in the larger cities Hard Money Lenders will be competing against each other for the business so, in turn, they will offer lower rates.
Normal interest rates range anywhere from 12% to 15% but in larger cities we have seen it as low as 8%. Another thing that goes into determining the interest rate is the riskiness of the project. So make sure you do your homework and find which business near you is offering the lowest interest rate.
How to Search For a Hard Money Lender
When searching for a hard money lender, the first thing you should do is check with the BBB (better business bureau) or the Real Estate Investors Association to see if they have considerable amount of lending experience along with a solid reputation. There are two varieties of hard money lenders, direct lenders and brokers. Brokers are a type of middleman between the borrower and the investor. Direct lenders will give loans using their own capital and since there is no middleman involved you will normally get better rates along with greater flexibility on the terms of the loan.
Make sure to ask your Hard Money Lender if your loan will be based off of the property’s current value or the after repair value. Make sure you ask how they determine the after repair value. Will they have an
actual appraiser come out to appraise the property or are they going solely off of comparable sales in the neighborhood.
Ask if there are upfront fees that will need to be paid out of pocket. There are normal upfront fees like appraisal and document fees but be very careful with any lender that demands you pay a loan application fee.
There shouldn’t be a loan application fee at all, so if they try to make you pay this, take your money and run. Also make sure to ask if there are any hidden fees.
Inquire if there will be a down payment needed
and if so, how much it will be. Check to see if there are any penalty fees for paying the loan off early or if the loan goes past term and how much that will cost you.
When going into a deal like this, it is always better that you do as much research as you need in order to be comfortable with the transaction. Ask for references, talk to other people in real estate and see if they
have done business with that company before and if so, how did they like them. Make sure you get every piece of information you possibly can in order to make the best decision for you.
Want more advice on hard money lending? We suggest you take a look at our hard money secrets guide for more great information.