What is a hard money lender and how does it work?
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If you are a real estate investor, you already know how urgent some opportunities can be.
Conventional loans may not be ideal for such situations due to their lengthy and rigorous approval procedures. For most real estate entrepreneurs, hard money loans are a lifeline in such cases.
If you are new to the concept of hard money as a means of financing, this article will walk you through everything you need to know about hard money, hard money lenders, and everything in between.
What is a hard money lender?
To understand what a money lender is, you must first understand what a hard money loan is. A hard money loan refers to a short term loan obtained from unconventional lenders such as high net worth individuals or private businesses.
That said, a hard money lender is an individual or business that uses their capital to finance other people’s businesses, primarily commercial real estate. These people and companies are independent of any financial institution and interact directly with borrowers. If you are unsure of where to find local hard money lenders to fund your projects, HardMoneyHome.com can help you locate hard money lenders near you.
How a hard money loan works
Hard money generally works like other asset-based finance. In hard money loans, the purchased property becomes collateral, minimizing the risk for the lender and the borrower.
This means that if for some reason the borrower does not repay their loan, the lender will sell the property to get their money back.
Hard money loans are generally short-term loans that are repaid between six months and two years. Unlike traditional lenders who require a borrower to have a certain level of creditworthiness before approving a loan, hard money lenders focus on the value of the property purchased or on an investor’s history of success in investments. similar projects.
The downside to easy access to hard money loans is that lenders take more risk, which results in more expensive loans. Typically, hard money loans have higher interest rates than conventional loans, with the 2020 rates averaging 11.25%. In some cases, interest rates could reach 15%.
Down payment loan conditions
Like conventional mortgages, hard money lenders require investors to put money into an investment as a down payment. Down payment requirements often vary from lender to lender. However, the typical rate is 10% of the appraised value of the property.
The down payment is calculated based on the property’s loan-to-value (LTV) ratio. For example, if you want to buy a property with an appraised value of $ 100,000, the lender will offer a 90% LTV. This means that you will need to invest $ 10,000 in the property before your loan can be approved.
Who Should Take A Hard Money Loan?
As long as you are eligible, you can take out a hard money loan. However, hard money loans are best suited for real estate entrepreneurs who are facing credit problems and setbacks, when you have credit problems but need a loan, or when the time is a factor in your project.
Although hard money loans are readily available, lenders will not lend just any amount. Instead, they’ll need to know what your project is and its feasibility. Often, lenders will need to obtain the correct valuation of the property from professional appraisers and the cost of renovations, if applicable, from the contractor, before approving your loan.
Although hard money lending is legal, there are aspects of the business that remain largely unregulated by the Federal Reserve Bank. Therefore, it is essential that you do your due diligence when entering into deals to ensure that you get the best value for your money.
This article does not necessarily reflect the views of the editors or management of EconoTimes.