When you want to invest in real estate property, one of the first things you might want to look into is the loan options that you have.
With a plethora of lending institutions and private money lenders out there and the real estate agents, brokers, advisors, experts, etc. – It is quite common to be overwhelmed about your lending options.
Many a time, the loan you take to fund a particular type of commercial real estate financing need will determine your overall real estate investing success.
Thus, sourcing the right kind of loan becomes most important. While considering your loan options for Commercial real estate investing, you’ll come across the hard money loans for real estate.
There are many myths – some true and some untrue around the whole hard money loans. While some real estate investors believe that these are go-to loans in some circumstances, some others do not recommend this as the best type of loan.
So, are hard money loans for you? Well, it depends. Depends on what?
Read on to find out everything you need to know about the hard money loans – should you take them? Are they the best fit for your real estate financing needs? What are the terms of these loans? What to do if you want to finance hard money loans for bad credit? How easy it is for you to find them? And everything in between.
With over decades of experience in the business of lending, we have put together a blog covering all the important questions on hard money loans with the most relevant answers. Read on.
#1 – What are hard money loans?
For starters, the first question would certainly be – what are hard money loans? Hard money loans are loans that are provided by non-bank sources. Loans provided by private individuals, lending agencies, lending corporations, an insurance company and the like all come under the umbrella of hard money loans. Put it simply, hard money loans are non-bank loans. They are also called private money loans as in most typical scenarios, and they are sourced from private companies or private lenders who deal as individual lenders.
#2 – How does a typical hard money loan look like?
A typical hard money loan will have rates of interest ranging anywhere between 8% to 18% and the term of the loan generally lies between 3 months to 2 years.
Drawing comparison with a more traditional loan, you can say that the interest rates charged by hard money lenders are much higher than that of a bank and the terms of the loan being much shorter.
You should note here that these terms and interest rates are for a typical hard money loan and it can vary greatly in reality from one lender to lender. If you’re good with negotiating or have other means through which you can get better deals from private money lenders, you can surely get loans at cheaper rates.
Remember that with hard money loans, you’re dealing with lenders who do not have a fixed set of rules to follow and can be highly flexible, so it’s up to you to negotiate terms and rates and take home best deals. Also, finding the right hard money lender is very important at this stage. It has been in discussion in the later part of this blog.
#3 – Do hard money lenders cover the entire purchase price of the real estate property?
While talking to people about the terms and prices of hard money loans, we often get asked if hard money lenders cover the entire purchase of the real estate property.
The reason many people still believe that hard money lenders probably cover up for the entire cost of the real estate property is that it used to be like that a few years before.
Until the year 2007, it was very common for the hard money lenders to cover the entire cost. But after the 2008 real estate market crash, most lenders have rather become very cautionate and it’s almost impossible to find lenders who are willing to cover for the entire price of the property.
So, generally you will be expected to bring in a certain percentage of the property price as a down payment.
Now, this down payment percentage varies from one lender to another but in a typical scenario, you can say that it ranges anywhere between 10% to 40%.
Remember that many private money lenders consider the down payment paying abilities of their borrower as a scale to decide whether or not to fund the loan. So, if you’re looking for a hard money loan, be prepared to bring in some percentage of the property price as a down payment.
#4 – What are the types of collateral I can provide in order to get a hard money loan funded?
Hard money loan for real estate investors generally requires them to provide the real estate itself as collateral. This is true for majority of the cases. However, there are a few hard money lenders in the market who do accept collateral in the form of jewelry, recreational vehicles among the other types of collaterals.
Finding such lenders is a task and you cannot always be assured of the best rates and terms of the loan when you want to explore such a possibility.
So, in most cases, you will be required to provide your real estate itself as a collateral to your lender.
#5 – Will the hard money lenders be willing to fund loans to someone who has a poor credit score?
Many people wonder if they can get hands-on a hard money loan when they suffer from a poor credit score or have other negative remarks like bankruptcy, foreclosure, short sale and the like in their credit report. So the answer to this again depends on the kind of private money lender you are dealing with.
A good majority of hard money lenders do not go ahead to fund loans to borrowers when they have serious negative remarks showing on their credit reports. But at the same time, some lenders are willing to fund loans to borrowers with such poor credit reports or bad credit history.
So, will you get your loan funded or not with a poor credit score? You should explore the choices you’ve got to find a convincing answer to that.
#6 – Can I get a hard money loan for longer terms like 10-15 years?
In most typical scenarios, the answer is no. It is very hard to practically find lenders who are willing you find you a hard money loan for such longer durations. However, again there are exceptions.
You might find lenders who are interested to fund you loans for longer periods of time with an extended timeline, maybe by hiking up the interest rates even further of by making other arrangements.
So, the key here again is to do your research, ask your real estate investors’ circle around to figure out if you can find lenders who fund your loans for a period much longer than an average of 3 months to 3 years.
One key thing to bear in mind here would be that before taking a hard money loan for such long periods of time, it’s important that you really analyze if such long term loan is even necessary for you in the first place.
A long term loan may give you the benefit of lesser out-of-pocket expenses in the beginning, but in the long run, you will definitely end up paying up a lot more interest than you otherwise would. So, make a note here to make an informed decision.
#7 – What are some of the most basic questions to ask a private money lender while procuring a hard money loan?
This is one of the most important questions. Choosing the right kind of lender to find your real estate financing needs becomes even more important and relevant when it’s a hard money loan as you shall be now, working with people who do not have strict norms of regulations like the more traditional regulated banks.
It has got its own set of advantages too which sometimes makes hard money loans the best go-to options. So, here are a few questions you need to ask your private money lenders while deciding to choose them or not:
- What is the experience your lender has in the business of commercial real estate lending? – The experiences speak so much about the credibility of the lender and also gives you a bare idea about the bandwidth of your lender. Experienced lenders often have great working knowledge about the real estate transactions and in many cases, they can turn into real-time advisors who can provide you timely and valuable suggestions.
- What is the portfolio of your lenders? Or what are kind of real estate projects your lender has funded before? – The reason this question is important is that it helps provide you an idea about your lender’s expertise. Different real estate properties require different types of funding and working with a lender who has fair share of experience in dealing with the real estate projects that resonate most closely with you is definitely helpful!
- What are the terms of the loan? – It is one of the basic questions you will need to ask your lender. What are the terms? What is the down payment you are required to bring in? What are the interest rates? Are there going to be any pre payment penalties for the loan? If yes, then what are the rates of that? What are the overall closing costs of the loan? And so on. Remember that with many lenders out there, finding out the best fit for your financing need becomes effective only when you exactly understand about all the terms of the loan with a bunch of lenders, and then going ahead with one specific lender becomes very important.