Some Hard Facts You Must Know About Hard Money Lenders

Posted on: January 9, 2011

Categories: Buy, Investors, Things To Consider

Author: lbuen

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If banks are your only source of funding for your real estate deals, then you must be moving slow and missing on great real estate deals. A fledgling real estate investor may do well if he includes in his network a number of hard money lenders. These are private lenders, who could be private individuals or lending companies, who provide short-term loans to fund real estate deals. The loan amount granted will depend on the value of the property in question, which is also put up as collateral. Despite their appellation, they can, in several ways, make a real estate investor’s life easy.

Hard Money Lenders for the Fast and the Serious

In real estate investing, it pays to move fast. And the fuel to your speed is liquidity. If cash is at your fingertips, you can attract great real estate deals. When acquiring a property, you can negotiate a lower asking price if you can pay in cash. This translates to a bigger profit margin or you can opt to sell the property at a lower price for a faster exit strategy.

If you are really serious with real estate investing, you must develop good business relations with hard money lenders because they can supply you with cash faster than banks do and they do not fuss about your credit rating. When applying for a bank loan, you will have to wait for 30 days or more for approval. That is, if you scored well with FICO. But when dealing with people in the hard money lending business, you will be counting fewer days, perhaps hours, if you have successfully tempered your relationship with them with a solid track record.

What Makes Hard Money Lenders Hard?

Now that we have seen their “soft” side, let us examine another side of them that makes them worthy of their name. Hard money lenders face greater risk than banks because they do not screen borrowers according to traditional credit guidelines, such as asking for income verification. This means they come up against higher default rates. For this reason, they charge higher interest rates which usually range from 12% to 20% per annum, with terms lasting six months to a few years.

To mitigate this risk, people involved with hard money lending usually require that the real estate loaned on be used as collateral. In some cases, however, the other assets of the borrower may be included as collateral to be able to obtain a larger amount. Hard money lenders typically base the amount they lend on the “Loan To Value Ratio.” A common figure would be 70% of the After Repair Value of the property. For instance, if the After Repair Value of the property is $100,000, the borrower gets to loan $70,000. Should he want to loan a larger amount, he can present other properties to add as collateral.

Hard money lenders may also charge closing fees which could range from 2 to 10% of the mortgage amount. They may also demand hefty prepayment penalties. So think again before deciding to pay your loan in advance.

While early hard money lenders protect their assets by just inspecting the property in question, a number of them today may ask for credit application that may probe about your tax returns, bank statements and current pay slips.

You may have noticed that hard money lenders are soft while borrowers are in the process of borrowing. But once you mess up with your payments, that is when they live up to their name. So make sure to correctly do your numbers before getting a hard money loan to avoid a hard time with hard money lenders.

Have you had any experience with hard money lenders? Tell us about it.

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