If you have ever heard the term “hard money,” chances are the first thought that popped into your mind consisted of muscled up money loans. Well, this is not the case. Leave your Hollywood imagination aside and see what hard money, or private money loans, are all about.
If you are looking for ways to boost your entrepreneurship or your business, then you will probably be looking for some alternative fund money sources. And if you are looking for properties then visit RoundTableRealty.com. However, before you jump into a private money loan for your real estate investments, there are several crucial things that you should know about using private money for your real estate investment.
- What is a Hard Money Loan?
What is the first thing you should know about hard money loans?
Well, you should understand what a hard money loan is. To put it in its simplest terms; a hard money loan is a short-term loan that is secured by real estate. These types of loans get their funding from private investors. This is different from conventional loans, where the credit unions or the banks provide financing.
The terms for the private money loans are usually spanning the duration of one year but can be extended up to 5 years. If you take out a hard money loan, then you will be required to pay monthly instalments. However, the payments that you will need to pay will only be the interest or the interest combined with a smaller principal amount- and then a more significant amount at the end of the term.
- How Much Money can be Borrowed?
This is primarily determined on the value of the subject property and can work in a couple of different ways:
– The borrower already owns the property, and the property is then used as collateral.
– The subject property is the one that the borrower is trying to acquire.
- The Most Crucial Factor for the Lenders
What is the essential element for the lenders? Yes, you guessed it- it’s the value of the subject property.
Does the borrowers’ credit come into play? To a certain extent, yes it does. However, it does not carry as much important as in a conventional loan with credit unions or with a bank institution. If you, as a borrower, are unable to acquire traditional loans because of other factors such as recent short sales or foreclosures, then the option of private money lending or hard money loans could be tempting. This is because, even after a recent foreclosure or short sale, a hard money loan could still be acquired. As long as the property equity (the collateral) is sufficient.
- What Types of Properties can be Used for Hard Money Loans?
Just about every type of property can be used for a hard money loan, including land, industrial, multi-family residences, single-family residences, and even commercial properties.
However, you may find that some private lenders prefer to focus on specific types of properties. These are more specialized money lenders and will not offer their lending services for residential if they specialize in commercial. This is mainly because of their experience and expertise, and prefer to stick with the areas that they have the most experience and knowledge in. When approaching private money lenders, you can ask them upfront which niche they are focused on if it is not already known. In this way, you will know immediately what type of loans they do, and which class they do not do.
There is one thing that you should be aware of when seeking out private money funding: Most private money lenders prefer not to lend money on residential properties that are occupied by the owner. This is because of Dodd-Frank and the regulations that accompany this type of arrangement. However, you could still find a money lender that will be ready to do the work involved so don’t lose all hope if this is your only option.
- The Different Types of Deals Hard Money Loans are Used For
Private money lending should not be used for all types of deals. For example, if you have a good credit score, have a stable and decent income history, and there is no foreclosure baggage, and if you have the time to wait for the approval process, then you should use regular banking institutions. Using private money funding sources should be your option if the more conventional sources do not apply to your situation.
The following situations are considered ripe for private money loans:
– Construction loans
– Fix and Flips
– Quick Action is needed
– Land Loans
- How Fast can a Hard Money Loan be Acquired?
There are many different reasons that real estate investors use hard money loans. The primary reason these loans are used is for speed. If a real estate investor needs a fast loan, then hard money is the way to go. This is because these types of financial funding can be done as quickly as one week. For a bank loan, it typically takes between 30 and 45 days. For hard money loans, the application process itself can take as little as one day and, some cases where the case is straightforward, the loan can be approved on the very same day as the application.
This quickness is the main priority for some borrowers, and for real estate investors, is a massive advantage.
- Interest Rates for Hard Money Loans
There is no set interest rate and points that will be applied to all, and it will differ according to the lender, as well as the area. If there are more private money lenders in your area, then you will most probably receive lower interest rates because there is higher competition.
Yes, there can be higher interest rates associated with private money sources; however, the benefit of speed could eventually balance the scales.
