Real estate is one of the best investment tools in your portfolio if you plan to boost your income and create long-term wealth. Whether you plan to be a landlord or flip houses, its low volatility makes property ownership an attractive option for investors with a low appetite for risk. So we’ve compiled 5 helpful tips for potential borrowers seeking a hard money loan to jumpstart their real estate investment.
What is a Hard Money Loan?
A hard money loan is a financing option backed by collateral, typically real estate property the borrower already owns or is seeking a loan on. In essence, it’s borrowing money from a private investor instead of a bank, which makes it a fast and easy solution, with a higher interest rate. Hard money lenders in Baltimore offer alternative financing for investors with varying financial backgrounds because the emphasis is on the value of the collateral in addition to your credit score and income.
As a result, they’re a common financing pathway for investors with less-than-perfect credit. However, they also come with shorter and stricter repayment terms, which can be a hassle for some borrowers. But if you play your cards right and plan strategically, they can also be a lifesaver.
Requirements for a Hard Money Loan Application
- Down Payment
Hard money loans aren’t a zero capital venture. If you want to secure funding for your next project, you need to be able to make a considerable down payment. Most lenders typically ask for 25% for residential properties and as much as 30% for commercial properties; in other words, borrowers need to have some liquid assets to meet this requirement.
- Equity
Another requirement for a hard money loan application is equity. As we highlighted in the previous section, this financing is asset-based, meaning borrowers must provide collateral. Most lenders prefer holding properties as insurance for real estate investments, so borrowers with valuable property are more likely to get approval.
- Income
Besides proving your liquidity and providing acceptable collateral, you also need to show you have a steady income stream. Loans come with ongoing repayments, and lenders often hesitate to work with borrowers who are unlikely to pay. If you have a reliable day job or other investments that guarantee incoming funds to cover your monthly payments, you stand a better chance of getting a yes.
- Experience
Experience is one of the essential questions to ask hard money lenders, but it’s also one of the questions they’re likely to ask you. Lenders are typically more confident in an investor when they have a history of flipping houses or completing other projects they need funding for, as it shows they’re a safer bet. However, that’s not to say newbies can’t get approval. It means you’ll have to prove your capabilities with an airtight strategy and plan to repay your debts.
- Appraisal
As a collateral-based financing option, most lenders prefer to have a third party evaluate the property in question. Thus, you will have to hire an appraiser who can carefully analyze and estimate the actual value of the property you plan to use as collateral and the one you intend to purchase. The final figures can help both parties during the negotiation process, ensuring fair terms.
- Documentation
Have the required documents handy. Like all formal transactions, hard money loans require proper documentation, albeit less rigorous than a traditional loan. Some papers you should have handy include proof of income documents, a deed of trust, and basic information about the property, such as location and loan-to-value ratio. Having these items ready to go will ultimately ensure a smoother and faster loan transaction.
5 Helpful Tips for Potential Borrowers
- Find a Reliable Lender
The best way to get a favorable deal and avoid getting scammed is to do your homework and find a reputable lender. Luckily, the internet can help if you know what to search for. Reviews and recommendations by other borrowers are often a good place to start. Of course, it would be best to focus on private lenders specializing in your project type. A lender with more experience in residential properties will be limited when dealing with commercial ones, potentially extending the approval process and offering unfavorable terms.
- Understand the Costs
It’s critical to get a complete and accurate picture of your loan’s cost before agreeing to anything. Although hard money loans typically have higher interest rates, other closing expenses can make them more expensive than a conventional mortgage. Added appraiser fees, insurance, and associated fees can inflate your monthly payments and cause unobservant borrowers to miscalculate. Moreover, late or early repayment penalties can also put you in a tight box if you don’t fully understand the costs.
- Negotiate Favorable Terms
Talk terms when you have a better idea of the loan costs. One of the perks of opting for a hard money loan is that their terms are much less rigid, and with a better understanding of your loan terms, you can exercise more control. Because borrowers vary from case to case, private lenders are more willing to compromise. For example, if the property you plan to use as collateral is worth more than the LTV ratio of your potential project, you can ask for more time to repay or a lower interest rate.
- Develop a Solid Exit Strategy
Speed up the approval process by developing a solid exit strategy. Private lenders prioritize interest over everything else and are more willing to back borrowers who know what they’re doing. Of course, investors with experience tend to inspire more confidence, but a well-thought-out strategy from a newcomer can be just as persuasive. So, analyze the market carefully and plan for contingencies accordingly.
- Be Transparent
Communicate with transparency for the best outcome. Remember, you’re not trying to one-up or outsmart your lender; it’s a collaboration. The more open you are with sharing details, the likelier they are to respond in kind and even offer better deals or discuss solutions.
Conclusion
In this comprehensive guide to hard money loans, we’ve highlighted the key components and requirements of this alternative financing option. Hard money loans provide a fast and accessible solution for borrowers, particularly those with less-than-perfect credit, as they prioritize collateral value. However, borrowers must make a substantial down payment and demonstrate equity, steady income, and relevant experience in their field. Additionally, thorough documentation and property appraisal are essential steps to securing a hard money loan.
For potential borrowers, finding a reliable lender, understanding all associated costs, negotiating favorable terms, developing a solid exit strategy, and maintaining transparent communication are crucial factors in successfully navigating the hard money lending landscape. By following these tips and understanding the intricacies of hard money loans, borrowers can make informed decisions and increase their chances of securing project financing.