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Hard money lenders – a guide to private money lending

Hard Money Lenders
Hard Money Lenders

Everyone would want to turn their real estate dream into reality, but it is also important to note that you need to have money to make money. When looking for a hard money lender to help finance your real estate investment, you need to find a lender who offers competitive rates and does not impose prepayment penalties.

Private money lenders can have your funds approved in as soon as two weeks with online application taking only a few days. Hard money lenders offer secured loans with a real estate asset as collateral. Hard money loans are mostly used to purchase a home or multifunctional building. A private money lender is any person who advances the money to you and can be either your friend, family member or a private lending company.

If a person is talking about private lenders, they are basically referring to hard money lenders. The lenders specialize in issuing short-term loans to either purchase or renovate a property for sale. Hard money loans are useful to both short-term investors and long-term buy and hold investors. One advantage of taking out a loan with private money lenders is that they are reliable and have convenient interest rates, loan terms and fees. The loan term varies from 1-3 years and attracts an interest rate of between 8-12% depending on the lender.

Who are private money lenders right for?

Hard money loans are helpful for short-term fix and flip investors who need cash to purchase and renovate a real estate property. The loan can also be advanced to long-term investors. Hard money lenders offer loans with varied interest rates, maximum loan amount, repayment plan and terms and conditions. One private lender may also require you to have different qualifications from what another lender will need. For you to get the best hard money loan to finance your real estate property, it is important that you compare the loan from different lenders to find the one with affordable terms and convenient rates.

Hard money loan approval time

Most private loans have a loan term of one month to 3 years. But if you take out the loan with a hard money lender, the loan term can range from 1-3 years. However, most lenders maintain their loan to a one-year repayment plan. Some hard money lenders also have prepayment penalties. This forces the hard money loan borrower to repay the loan in monthly repayments until the money is paid in full. If you qualify for the loan, your loan request form can be approved in as soon 10 business days.

What you need to qualify for a hard money loan

What you need to qualify for a hard money loan
What you need to qualify for a hard money loan
  • A good credit score
  • 3 months banks statements
  • The location of your property and the expected purchase price

If you want to hard money rehab loan, the following additional documents will be required

  • Renovations scope of work
  • Contractor Bids
  • A CV describing the experience and prior subjects.

Borrowers are not restricted to the number of hard money loans to request for. The loan can be used for financing a home in good condition or purchasing and renovating a home in poor condition.

What to Look for in a Private Money Lender

Borrowers should consider the following before choosing a private money lender to work with

  • Lender experience
    Most private money lenders will let you know the number of years they have been in the field and the number of loans issued. You obviously would want to work with a lender who has more successful deals. You can find this information on the lender’s website.
  • Real Estate Specialization
    You also need to find a lender who has specialized in a specific real estate property. For example, if you want to finance a residential property, it is advisable to work with a lender who specializes in residential hard money loans. This is because these lenders are more experienced in their area of specialization and can advise you if the loan is the best option for real estate investing.
  • Interest Rates and Costs
    Hard money lenders also have varied costs and interest rates. Typically, hard money loans attract an interest rate of between 8-12%. The fees also varied from 1.5-10% depending on your lender. When looking for a private loan, it is always best to find a lender with the lowest interest rates and fees.

The loan application process

Regardless of the hard money lender you decide to work with, you will have to go through the same loan application process. Hard money loan application process is divided into 2 parts:

  • Pre-qualification
    This process can take up to 3 minutes. It is a quick process to give the borrower an understanding of the different options available in private money lending.
  • Funding
    The funding process can take between 10-15 days. Here, the lender will gather all the required information and offer the loan costs, interest rates and terms. Your loan will be approved during the funding process.

Advantages of hard money loans

Hard money loans can come in handy for investors who quickly want to purchase real estate property for renovation. The faster approval process is especially what makes the loan attractive to a real estate investor. Here are some of the reasons why you should start filling out your hard money loan request form.

  • Low credit qualifications
    Since the real estate asset is issued as collateral, lenders do not focus much on the borrower’s credit score. In fact, there are lenders who can even advance the money to borrowers with poor credit history.
  • Faster funding process
    Hard money loans can be approved within 10 days after your loan request form is accepted.
  • Rehab financing available
    Private money lenders also offer rehab financing which helps lenders to purchase and renovate a real estate property with a single loan. This is unlike conventional mortgages which can only offer financing on a house that is in good condition.

Important considerations before taking out a hard money loan

Compared to conventional mortgages, hard money loans have a shorter repayment period. Most hard money lenders have a loan repayment term of between 1-3 years, but there are also lenders who have a payback period of less than 6 months. Hard money loans also attract a higher interest rate of up to 12% compared to conventional mortgage that has an interest rate of between 4-6%. If you cannot pay off the loan on time, you may risk losing your property.

How to effectively use a private money loan

Most real estate investors request for hard money loans for fix and flip projects. These are the projects that require short-term financing to buy, renovate and sell a house within a short period of time. However, the loan can also be useful for long-term investors who want to purchase a real estate property, renovate and rent them out for long-term leases. Hard money loans can be a perfect alternative for real estate investors who do not qualify for conventional mortgages.

Type of property funded by hard money loans

Hard money loans can help fund a wide range of both residential and commercial property. These include;

  • Single family homes
  • Apartments and condos
  • Multi-unit properties
  • Commercial real estate

Hard money loans can especially be useful to finance short-sale and foreclosure property. This is because such property attracts many buyers. The faster the loan approval process the higher chances you stand on purchasing such property.

Property value

Hard money lenders place more importance on the value of the property than the borrower’s credit score. Lenders issue the money to borrowers who have equity in a real estate asset, which is then issued as collateral for the loan. However, good credit history is still an important consideration on whether you get the loan you need to finance your real estate property. Acquiring a hard money loan is also possible for borrowers who have experienced foreclosure or short sale and are not able to access a loan in bank and other financial institutions.

Why go for hard money lending?

Getting a loan to finance your investment property is almost impossible and especially if you do not have an attractive credit rating. Fortunately, you can still materialize your real estate dream by taking out a hard money loan. The good thing with hard money loan is that there are no strict terms and conditions when taking out the loan. But remember to only take out the loan if you are sure to afford repayments on time.

Bottom line

Hard money lenders, also referred to as private lenders are individuals or companies that offer private loans with a real estate asset as collateral. Real estate investors take out the loan to purchase a property, renovate and sell it at a profit. What makes hard money loans attractive is that the approval process takes only a few business days. You also do not need to have a good credit rating for you to qualify for the loan. All you need to do is fill out a loan request form and get your funds approved in as soon as 10 days.

hard money lending
hard money lending

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