Hard money loans are short-term loans often secured by real estate property. As opposed to the traditional banks, these loans are funded by private investors, which is why they are also known as ‘private money loans.’ Hard money loans are primarily based on the value of the property as well as the borrower’s financial history. The amount of loans is determined by the loan-to-value ratio or simply LTV, which is a ratio between the amount of loan to the value of the property used as collateral.
The best part with hard money loan is that it is easier and simpler as compared to the conventional loans from banks. However, the borrowers may still need to qualify certain terms and go through the underwriting process to secure a hard money loan.
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If you are new to this field, the entire process of getting a hard money loan can end up as an off-putting experience. Before you finalize a deal, it is necessary to understand all the terms and conditions of the lender.
To further show the money lender that you are familiar with knowledge about hard money, and you have done your research, you need to ask the four questions that we have compiled in this post. These important questions will help you avoid bad situations with lenders, so they won’t be able to charge you additional fees.
Here are the four questions to ask lenders when looking for a hard money loan.
1. Ask about the terms of the lender:
There are three important terms you must know about when choosing a lender. They are Loan-to-value, interest rate, and points. The terms will differ from one lender to another, so make sure you ask multiple lenders and choose the best among them.
i: Loan-to-value (LTV):
Loan-to-value is the ratio of the total size of the mortgage you take out to buy a property to its market price. For investors, the more the loan-to-value, the more beneficial the financing. Your purchasing power increases with lenders who offer higher loan-to-value ratios.
ii. Interest rate:
Interest is the cost of money from lenders that constitute a large part of your monthly payments. When seeking out a hard money lender, focus on the interest rate because it can significantly impact your monthly payments. When it comes to hard money loans, borrowers often look for the lowest interest rates; however, to have more favorable terms, many investors will be willing to pay a higher interest rate on loans.
Points refer to the interest that you will pay in a lump sum on loan. It can be paid either upfront or periodically throughout the loan term. One point is 1 percent of the total loan payment on top of any other interest. Borrowers prefer lenders who offer loans with low offers, but if higher points provide them more favorable terms, they might be willing to pay more points upfront.
2. Ask about the lender's source of capital:
Hard money lenders usually have three options to fund deals. It is necessary to understand the three options and see if that would work for you.
i. Direct Lender:
Direct lenders are those lenders who use pooled raised capital, debt, or both to fund loans. Such lenders can handle large volumes and are flexible with underwriting guidelines and the structure of the deals. Direct lenders are stable and have a very low risk of not funding a loan.
Brokers outsource the deal to direct lenders for underwriting and funding. They often work with multiple direct lenders so that they can handle more borrowers. Since they are at the mercy of the direct lender’s timeline, funding from brokers may take more time compared to a deal with a direct lender.
A syndicator raises capital from individuals to provide funding for a deal. There is always a significant risk present for borrowers since funds are not always available immediately. They may offer better rates, but transactional delays may create problems for most of the borrowers.
3. Ask about the experience of the lender:
When looking out for a loan, make sure you choose an experienced lender. Lenders who have been in the business for long understand the nature of the industry and can offer you appropriate advice about your business. Working with experienced hard money lenders reduce the potential risks and pitfalls that haunt the money lending industry.
4. Ask for references and testimonials:
A good lender will have an extensive list of reviews and testimonials of previous clients to show to the potential borrower. These reviews can be found on the lender’s website or any third-party source. You should be wary of lenders who don’t have enough satisfactory reviews or testimonials.
It is also wise to ask your family, friends, or locals about good hard money lenders in the area. For instance, if you’re looking for hard money lenders in Houston, a person from that area will be able to tell you how Houston hard money loans work and where to find reliable lenders.
Asking the right questions can help you choose the right hard money lender. Once you find the lender of your choice, you can better protect your investment and make more profits.