How to Find the Best Private Hard Money Lenders in Your Area
Do you know what to look for when it comes to finding private hard money lenders? Here are some tips on choosing the right private lender.
Are you thinking about investing in property and flipping homes? If so, you’re making a great choice. Investors make an average profit of $61,000 with each home flip. But before you invest in property, you’ll want to know your best financing options.
Do you need quick cash for property investment? If so, hard money loans may be the best option.
A hard money loan (often called short-term bridge loans) is secured by real property. These loans are attractive to property investors because they receive financing from private hard money lenders, avoiding getting a traditional mortgage.
Since you’re going to private hard money lenders, you’ll want to ensure the lender you choose is the best one. Here are some qualities to look for.
How Do Hard Money Loans Work?
Hard money loans are approved based on property value. Most lenders won’t look too closely into your personal financial information. For example, while lenders will look at your credit score, they will accept applicants with a lower-than-average credit score.
Therefore, you can access financing quicker than if you were to get a mortgage.
Most investors receive their funds in only a few days. You can also receive reimbursements for renovations, which we will cover later in this article.
Hard money loan terms vary — some only last a few months while others last a year. Most hard money loan terms don’t last a significant amount of time, since interest rates are higher.
Similarly to a traditional loan, investors will make regular monthly payments on their loans. This includes interest and any necessary fees. Once you sell the property, you’ll pay back the remainder of your loan as well as closing costs.
In addition, you’ll put the property you’re buying down as collateral. In case you don’t pay back your loan, your lender will gain the property and will sell it to receive their funds back.
What Types of Property Can You Purchase With a Hard Money Loan?
Are you thinking about getting a hard money loan but aren’t sure what property types are best for this type of financing? Here are a few examples.
Most investors use hard money loans toward fix-and-flip properties. These are ideal because lenders receive their funds quickly. Hard money loans are also flexible; investors can also finance repairs and renovations with a hard money loan.
This is also ideal for lenders. Most flips are completed in only a few months. Since the loan term is short, most lenders know the investor will pay back the loan in a short amount of time.
Hard money loans are ideal if you need to close on a multifamily property quickly.
These loans are also ideal if you already have the property but want to finish some repairs before tenants move in. Finding a bank loan for renovations can be difficult, so investors will have an easier time securing financing with a hard money loan.
Like a multifamily property, investors can use a hard money loan to close on a rental property quickly or if their rental property needs repairs. Hard money loans have quicker approval rates and are more flexible than bank loans.
Commercial Real Estate
Residental real estate isn’t your only option. You can also use a hard money loan on commercial real estate.
For example, let’s say you have a tenant who needs a specific property that you don’t have. You can take out a hard money loan to purchase and close on a property quickly. In addition, you don’t need to prove you have the assets to purchase the property.
Loan Approval Guidelines
Even though hard money loans have quick approval times, you’ll need to ensure you qualify for the loan. Some common approval guidelines include:
- Property value
- Exit strategy
- Local market
You should also talk to a lender ahead of time to ensure you can qualify for their loan.
What to Look for in Private Hard Money Lenders
Before you sign a contract, know what makes a hard money lender reputable. Here’s some advice.
The first quality to look for is by far the most important. Trustworthy private hard money lenders should have a great reputation in their community, not just among other private lenders. This is why you’ll want to ask your network while looking up past reviews on different lenders.
You’ll also want to ask for referrals and advice on the Real Estate Investor Association. In addition, the Association has local chapters so you can ask other investors in your area.
It also doesn’t hurt to run a potential lender another source. The best example is the Nationwide Multistate Licensing System and Registry. This is a national organization that records financing service licensing across different states. They may also have a broker license or are licensed by their state’s department of real estate.
Simple Lending Process
One of the many benefits of hard money loans is the application process is simpler compared to a mortgage. You don’t have to worry about a lengthy underwriting process or a complex application. The application is straight-forward and you’ll receive your funds rapidly.
As such, your lender should work quickly. Your lender should approve you quickly and deliver the funds in a timely manner. If they make the process complicated, making you wait for your funds, or you have to jump through hoops, you may have found the wrong lender.
You’ll likely have to spend more money than the cost of the property. Renovations are a common part of flipping houses; you’ll want to sell a house that doesn’t require additional repairs, after all. Depending on your finances, your loan amount will likely have to cover rehabilitation expenses.
Reputable lenders can accommodate this for you. Once the loan is approved, your lender will likely sit down with you to plan out your renovation and the expected costs.
From here, your lender will disperse reimbursements in a series of draws. You may have to receive your funds in different draws, depending on how much work needs to be done to the property.
Keep in mind, many hard money lenders will only fund your renovations if they’re done with licensed contractors. If you’re a DIY lender, you’ll have to find another financing solution.
One of the drawbacks of hard money loans is they’re more expensive than traditional loans. Hard money loans typically have higher interest rates. On top of that, they have shorter payback periods.
Does that mean your loan should be overly expensive? Rates will vary, depending on your circumstances, your geographic region, and your lender.
There may also be additional fees included in your loan. For example, origination fees/points cover the processing and other costs. One point equals one percent of the loan worth. Always ask if the lender charges an origination fee so you factor in that cost.
Additional fees may include:
- Application fee
- Broker fee
- Document prep fee
- Underwriting fee
- Funding fee
- Processing fee
Other costs are determined by the loan-to-value ratio. Your lender will find this number by dividing the loan amount by the property value. In addition, some lenders calculate loan-to-value by using the property’s after-repair-value (ARV).
In short, the higher the ratio, the more risk for the lender. As a result, they may increase the interest and even the fees.
Be on the lookout for fees that are too high and other predatory practices. Read the contract carefully before signing it. Don’t agree to a loan if you’re not for sure you can pay back the loan in the required timeframe.
Most lenders require a down payment, which is usually 20% – 30%. But this depends on certain factors. For example, if you’re an experienced investor, you may be able to finance the entire cost of the property.
However, predatory lenders may advertise no down payments on their loans. They will get you with other factors such as unrealistic payment schedules, large fees, and crazy payment terms. Always conduct research on these companies before signing any contractors.
Common Questions Asked About Hard Money Loans
If you’re a new investor, you may have some additional questions about hard money loans. Here’s what you need to know.
Can You Get a Hard Money Loan From a Bank?
No, only private lenders offer hard money loans. This is why you need to be diligent about which lender you choose.
What If You’re a New Investor?
First-time investors may have trouble getting a loan. One of the factors that lenders look at is experience. That’s because the lender has no way of knowing if you can manage the closing and construction of the property while paying off the loan.
If you’re a new investor, ask a lender how much experience they require from a borrower. If you do have some investments under your belt, present a portfolio.
Are You Looking for the Most Reputable Private Hard Money Lenders?
If you’re looking for private hard money lenders, you don’t have to look much farther than us. We offer bridge financing as well as fix and flip loans. Apply for a loan today!