How to use Hard Money Loans?
Hard Money Loans
How to use Hard Money Loans? most investors have tried seeking a loan from a traditional lender and agree it is always painfully a slow process. It begins with the affirmation of the credit scores than the income on hold to repay the loan.
As if to make it worse any negative credit report by a lender stretches the process even further and sometimes end up even not getting the loan. These disappointments are what made lead to the rise of Hard money lenders.
Hard money is a manner of borrowing loans from an individual or investors based on the property on hold as the collateral. They are less concerned about the ability of an individual to pay but rather the property collateral value. They operate as short term, but their interest rates are usually higher than the traditional loans.
This article will elaborate on the various terms involved in the real estate business especially on the aspect hard money. It will further explain the reason why it has been a topic of discussion by many real estate brokers and who needs it.
What really is Hard Money?
The hard loan has attracted much debate in the real estate industry. Of course, this loan is not fit for every character, but to some, it perfectly fits their nature of business such as real estate investors, developers and house flippers. This is because a hard loan is easily accessible and cut through the red tape.
As an investor, if one manages to establish a good relationship with a local hard money lender that he or she will have secured quick source of capital and most of the times holding no appraisal or extra costs.
The beauty of it all is that this form of loan does not give much consideration to the credit scores. Thus most of this investors capitalize on the nature of this loan an acquire hard money to get into the property, then proceed to do some quick fixes to increase the property value and acquire a new loan from the banks on the new property value to pay off the previous hard money,this can also be termed as hard money real estate loans.
Pros of using Hard Money Loans
- Basically what makes hard money real estate loan to stand out is the flexibility and speed that it incorporates. It gives an investor freedom of capital more than most investors relying on the traditional lenders. However, this form of investment is not purely practical.
- It holds some of its shortcomings. This is simply the fact that it is expensive and thus the investment has to go right for the profit to materialize. The lenders may seem to hold levels of ignorance on the paying capability of an individual but use more conservative methods to value a property. Most of the lenders keep their loan to value ratios relatively small.
- With this low, ratios the lenders hold an added advantage of being able to dispose of the property as fast as possible and possess much higher chances of recovering their money.
- Different hard loan lenders offer different requirements For instance in Texas it is charged 5% origination and 13% interest on a one year note. However, the beauty of it all is the fact that one as an investor deals directly with the lender.
- This room for negotiation is typically high, and it becomes even easier to establish a rapport. Moreover the aspect of skipping vetting with a loan committee process or underwriting process. The amount of money that the lender can offer sometimes runs up to 100% of the property price. However, it is greatly determined loan to value ratio that is calculated by the loan amount divided by the value of the property. This sort of loan emerged and got popularity in the 1950s in the United States of America when its credit industry was shifting drastically.
- For those that needed capital in the value of their belongings gained so much from the system. Since then this form of lending has remained unregulated by the federal or state laws despite some restriction on the interest rates that are regulated by the state government.
Who uses Hard Money?
In the real estate business, this form of lending has considerably gained more clients after the 2009 mortgage crisis in the United States and led to the passing of the Dodd Frank Act.
This Act made the field of mortgage lending to be practically hard through the establishment of a strict regulation for the banks and lenders. The government required the lenders to access the application for a loan or mortgage through borrowers primary residences or rather end up punished with massive fines if unable to comply.
Thus to prevent a loan given out from qualify into the Dodd Frank Act the lenders only gave out cash on business purpose or commercial loans. To establish the value of a property the lender usually rely on the broker price opinion or if not an independent appraisal done by an official from the relative state.
Someone may hesitate from approaching an investment through due to the bad reputation on hard loans. Before the much popularity of this form of lending, some shady individuals were a predator when offers on loan terms with real estate as the collateral and intending to grab the property from the borrower. However, this form of trickery is out of the lending market.
Currently, the lenders choose to stick with one specialized form of collateral such as residential or land loan according to the level of experience involved. The interest rates and points that are charged with the lenders will vary from lender to another and also from one region to another. For instance, in California, the interest rates are pretty lower than the rest of the regions because it holds many of the lending firms. However, banks should remain as the first consideration for some particular deals such as purchasing a primary residence with good credit
In real estate business deal there is always a time when a targeted property is faced with many competing bids. This moment calls for quick closing up of the deal quickly with money at sight. This will separate an individual from the rest that is making the same bid, and thus the kind of lending significantly remain relevant for the real estate investors. Furthermore, investors not always coincide with the plans.
- It is common for short sales, foreclosure and credit issues to occur. This together with the strictness of the regulation set in place will put out many potential borrowers, for instance, a borrower who has signed in to a new job may end up being a victim. Therefore hard loan is considerate the potential of the borrowers and further increases the interest rates to cater for the risk factor involved on their end.
- Some lenders end up considering the after repair value of a property as the collateral. The after repair value or the ARV is the estimated value of a particular property after the borrower has finished improving the property.
- To make the deals even seem more juicer to the borrower some of the lenders will lend with a high percentage of the ARV and furthermore even offer the financial support of the renovation of a property. However, this is maybe appealing to the borrower, but the risk is much higher with the interest rates and points hiked. Most of the times in the real estate business it will remain wise for an investor to pay all these exorbitant rates to be in a better position to seal a bid and generate profit from the investment made.
Monetary issues always need much caution and getting a lender to work with freely needs patience. One should begin with making a point to connect with various investors. Then research who in the area of operation loans money based on collateral. Real estate agents or even investors are a proven resource for good lenders. After establishing the lenders in the area, one should follow up by contacting few of the most likely ones and explaining the needs at hand and work on building a rapports so that in the long run one maybe in a position to fund investments as quickly as possible when they appear. The lender then is tasked with making consideration of the plan played for the property.
Thus the borrower should be ready to present a proposal that will be convincing enough that the project set in place shall be productive and ultimately pay off the loan. Usually, in the real estate business incorporates the improving of a property and disposing it on a higher price or rather obtaining long-term financing some other day. The other remaining ways to get a good reputable lender is searching online according to the area of residence.
In conclusion, I hoped this paper has shed some significant light on the hard money loan and uplifted the confidence of an investor who needed funding for the future deals. The bad reputation that hard money held before should not hold anyone back from making investments as hard money has previously and currently proven to be working efficiently to those keen enough.