5 Crucial Facts about Hard Money Loans

If you are considering seeking private money loans (also known as a hard money loan), then there are a few important points to consider in the private money lending business. A hard money loan can be a very good option for a borrower who is self-employed, has little or poor credit, or has had a recent bankruptcy or short-sale or foreclosure sale. But private money loans do not work for everyone who needs cash. To determine whether or not a private money loan is the right option for you to take, read on to review five crucial facts to know about private money loans.

Strict Requirements

While not many in number, the hard money loan does have strict requirements. Although traditional loans are underwritten by a bank and often include numerous strict regulations that must be adhered to, the hard money loan has its own set of terms and conditions for the private trust deed investor. The hard money loans requirements relate to items such as the value of the real property (appraisal), the purpose of the loan (business or personal), the borrower’s credit and the term of the loan which is often very short (1 to 3 years is typical). Lastly, most hard money loans are funded by private trust deed investors who are individuals investing their personal funds in trust deed investments and so they often have their own set of loan conditions.

You Have To Do Some Homework

In order to present a hard money lender with a good loan application to increase your chances of securing a hard money loan, it is best to have several items ready to present to them. A loan application that outlines the loan applicant’s personal information together with the property information is very important and that includes information about assets and liabilities. Additionally, it is good to review your credit report so that you can explain to the hard money lender any questions that might arise. A hard money lender will also need an appraisal on the property so as to understand what the property is worth. Lastly, it is important to know how you will take legal vesting on the property, that is, will it be you as an individual, or with your husband or wife, or in the name of your corporation or limited liability company. Thinking about these items and preparing them ahead of time will greatly lessen the time to process a hard money loan.

Higher Rates

Very often, a hard money loan means higher fees and interest rates for the borrower. This reflects the fact that there is generally more risk to lending to these borrowers. What hard money lenders try to do is to compensate for this higher risk by charging more and then protecting their funds by lending on a loan transaction to a borrower’s home that has a lot of equity. Lender’s regard these loans as trust deed investments. Additionally, hard money lenders ask for higher rates because these loans are of a short term or duration. As hard money loans usually place more reliance on the equity in the property rather than on the strength of the borrower, they have limits on the amount or the size of the loan they will provide; this is called the loan-to-value ratio (the “LTV”). Most hard money lenders will not underwrite loans for higher than a 65% LTV ratio. And the higher the LTV, the higher the interest rates, which can go as high as 12 percent on up.

Bridge Loans or Repair Credit

Hard money loans are often used to finance a real estate purchase transaction because the borrower’s other funds are not currently available; the hard money loan is a “bridge” to allow the transaction to go forward and then be paid off when the other funds become available. While high interest may have been paid, it is less costly to pay those costs than to lose the larger investment opportunity in the long run. Additionally, many borrowers use hard money loans because their credit is temporarily impacted by a situation in their life (e.g., foreclosure, divorce, loss of a job). In both cases, borrowers use hard money loans for a short-term period to conduct their business and to avoid losing key opportunities presented (such as a rental property that is for sale down the street at a bargain price).

Higher Rates

Very often, a hard money loan means higher fees and interest rates for the borrower. This reflects the fact that there is generally more risk to lending to these borrowers. What hard money lenders try to do is to compensate for this higher risk by charging more and then protecting their funds by lending on a loan transaction to a borrower’s home that has a lot of equity. Lender’s regard these loans as trust deed investments. Additionally, hard money lenders ask for higher rates because these loans are of a short term or duration. As hard money loans usually place more reliance on the equity in the property rather than on the strength of the borrower, they have limits on the amount or the size of the loan they will provide; this is called the loan-to-value ratio (the “LTV”). Most hard money lenders will not underwrite loans for higher than a 65% LTV ratio. And the higher the LTV, the higher the interest rates, which can go as high as 12 percent on up.

Hard Money Lenders Are Not Loan Sharks

When we talk about a hard money loan or hard money lenders, many people believe such lenders are people from the underworld. In fact, calling a hard money lender a loan shark is probably the most prevalent myth in the hard money lending world. Hard money lenders or private money lenders do charge higher rates, but the savings that a borrower can realize as the result of receiving a hard money loan can be significant over the long term. The alternative is no loan at all and that lost opportunity is more costly that a higher interest rate.

Researching the terms and conditions of a hard money loan before deciding to choose one is very important. It can also help you to make an informed decision about what hard money lender is best for you as not all hard money lenders are the same, and a good hard money lender is hard to find.