If you’re an aspiring real estate investor, chances are that you’ve heard of private lending and hard money loans. There are a lot of reasons why real estate investors are typically advised to seek these types of mortgage loans over others, especially when they’re just starting out. While traditional mortgage loans may have their appeal, they’re not always accessible to novice real estate investors.
Many real estate investors are turned away because financial institutions are concerned about lending to people who are seeking fix and flip loans. They worry about whether or not these investors will be able to get returns on their investment, which could impact their ability to pay back their loans. Additionally, many traditional lenders have been more cautious to give quick approvals to investors since the 2008 financial crisis.
With that being said, you may not yet be comfortable when working with a private lender. That’s understandable! To demystify some of the issues surrounding private loans, let’s look into some of the most common questions surrounding this topic.
How Long Do the Loan Terms Last?
One of the main questions that borrowers have regarding hard money loans and their terms is how long they last. After all, you want to know how long you’ll be dealing with a loan before you sign up for the loan itself.
Normally, hard money loans have shorter terms than traditional terms. A standard hard money loan term would be anywhere from six months to a year. But there are some circumstances in which some private lenders will be willing to negotiate, which means they could be able to offer borrowers more extended or flexible terms. Usually, a standard hard money loan term will last up to two or three years. Often, an extension will come with increased fees and taxes.
How Does the Approval Process Work?
Obviously, it’s not enough for many potential investors to take their quick approvals and accept them. Often, investors can be a bit concerned about how the approval process works, as it frequently involves lenders looking at their credit histories. The great thing about hard money lenders is that there is usually a different process involved entirely.
Usually, hard money lenders will require the title of the property you wish to invest in, as well as proof of insurance and an appraisal. However, they tend to focus more on the collateral property you’re offering rather than your credit history or your debt to income ratio. The collateral ensures that the hard money lender will receive repayment no matter what, even if you’re unable to make payments in a traditional manner. This means that hard money lenders are more likely to take a risk on borrowers, and for that matter, they are better equipped to offer quick approvals. It can take as little as 72 hours for a borrower to receive their funds after applying for hard money loans.
What Can I Expect For Interest Rates?
Interest rates are often considered to be the “catches” of loans. But as hard money loans usually have shorter terms, there is less time for that interest to build to an unreasonable degree. Interest rates do obviously vary depending on the lender, but you can generally expect hard money loan interest rates to be between 10% and 18%.
Can I Use the Money for Repairs?
This is a major concern for many borrowers seeking quick approvals for hard money loans, as they’re often doing so to flip homes. A lot of lenders will ask for documentation for all completed repairs, as well as contractor and subcontractor invoices.
Does My Credit History Even Matter?
Your credit history will always matter, but for many lenders, its effect will be minimal. Bankruptcies and foreclosures in your credit history may be questioned, but generally speaking, having a low credit score won’t disqualify you from a hard money loan.
There are a lot of benefits to working with hard money loans. While they aren’t for everyone, they can be great options for individuals seeking the ability to buy a property. Seek out a lender yourself and see what they can offer you!