Hard money loans can be used when people do not have the best credit but they have collateral they can put up to secure the loan. Another difference between hard money loans and traditional mortgages is the turn around time. When you go for a traditional mortgage, it can take months to receive the funds. When you work with hard money lenders, you will get the funds much quicker. Hard money loan rates are higher but sometimes, it is worth it.
For commercial real estate investors who have a great deal that they need to close on right away, getting a hard money loan may be a better option than a traditional mortgage because it will give them access to the cash they need faster. Hard money loans can be finalized within a few days to a week. After that the time to dispense the funds can be as short as three days.
If you are looking into applying for a hard money loan, you have a lot of options for where to go. Here are some tips for finding the right one:
- Hard money lending should be the specialty of the company you go with. You need to work with someone whose specialty is hard money loans because of the complicated nature of the process and compliance requirements. You also want to go to someone that you know can set up your loan, including the hard money loan rates, to be beneficial for everyone.
- Go with a local lender. It is not unusual for hard money lenders to want to take a look at the property you will use as collateral for the loan. This is not to say that there are no nationwide hard money lenders but you may have a better experience if you go to a lender who is located near you. They can be more flexible.
- Make sure the level of transparency is high. The loan data needs to be readily available to all of the parties who are a part of the loan throughout the process. There are guidelines that govern the hard loan process. Stay away from lenders who offer hard money loan rates that are ridiculously low. These are set that way to get you in the door but they are never the read hard money loan rates that you would get.
- You need a lender who has the right licenses. Every state has a Department of Real Estate. You need to work with a lender who has a license from this agency. They should also be registered with appropriate organizations. The Nationwide Mortgage Licensing System and Registry is one such organization. Reputable lenders will also have a Real Estate Broker license and be in good standing with the Better Business Bureau. Do your due diligence when you look into them.
- Think about what you will use the loan for. You can finance a number of different projects with your hard money loan. Different hard money lenders may specialize in these different projects. If you are looking into a commercial real estate deal you want to go to a private hard money lender who specializes in that as opposed to a hard money lender who specializes in investor relations.
- Prepare your information. Before you go to any hard money lender, you should prepare a packet with all of the information about the property. This includes its address, your budget, all of the pertinent dates and as much of a business plan as you can put together. The more organized you are, the more likely you are to get the loan you want.
- Learn the phrase, “loan to value ratio.” When hard money lenders are looking at a project, they are interested in how much the property is worth if it were to be sold the day the loan goes through. You should expect the hard money lenders to be more conservative in their way of assessing the value of the property you are going to use as collateral than if you went to a bank for a traditional loan. You need to be able to give the hard money lender the loan to value ratio.
Hard money loans can be great options but you need to be careful picking your lender.