There are many reasons why a real estate investor would choose to get financing from a hard money lender. The process of approval takes virtually no time if you compare it to conventional lending. It often takes one to three days, and if delayed, never longer than one week. It takes traditional lending institutions like banks more than a month to respond to your request.
The ability to access financing from a private lending business is critical when running a real estate business. It may just be in time for you to make a quick offer to a seller before the other competing bidders can react.
Financing from hard money lenders is also beneficial to those who have been rejected by banks. The institution can turn down your request due to foreclosures and bad credit. Sometimes it is not the fault of the borrower. For example, if you just got a job, the bank can reject your application due to insufficient data on your income.
Hard Money Loans and Interest Rates
The interest rates from a hard money lender will usually be higher than from traditional banks. This is because of the higher risk due to bad credit, or the borrower’s other financial issues. The interest rate can vary from state to state, but it tends to be in the range of 7.5% to 15%. The charge for hard money loans in Atlanta, GA, is about 13%.
Market dynamics can also influence the interest the lender will charge. Some states like California have some of the lowest rates because more companies are providing the same type of financing. Competition and market dynamics can bring down the charges significantly.
The rates are not just based on your location or state. It can also vary from one lender to the next. The charges may depend on the company’s internal policies or the type of loans they provide. Some types of bad credit loans you can get from hard money lender in Georgia include:
- Fix and Flip Mortgage
- Line of Credit Financing
- Purchase loans
- Refinance loans
Loan to Money Ratio and Interest Rates
The loan to value (LTV) ratio is one of the factors that typically determine the interest rates. A hard money lender calculates the LTV by dividing the loan amount against the value of the property. The ratio helps lenders establish the risk of the venture. When the loan amount is high, the contribution from the borrower is low, and is, therefore, seen as less risky.
Many private lending companies offer 65% to 75% of the loan amount. Others will base the loan-to-money ratio on the value of the property after remodeling. If you are investing in property, there are ways you can minimize the risk and increase your prospects:
- Increase your Down Payment: The more money you can contribute to the total amount, the lower the risk perceived by hard money lenders. With a higher down payment, you can demonstrate your commitment to the venture giving you access to better rates.
- Boost Your Resume: Lending companies consider first-time lenders to be risky. You can get better rates by building up on your real estate investment resume. You may work with other players in the property market to get access to information and enhance your credibility. You can start with investments that are low-cost to gain experience and improve your chances of getting a bigger loan in the future.
- Improve your Business Credit: If you intend to turn house flipping into a business, take time to work on your business credit. It will boost your reputation and your relationship with vendors and suppliers.
Bad credit financing will typically have interest rates ranging from 7.5% to 15%. You can get better interest rates from your hard money lender by taking several proactive steps. Before going for fix and flip loans, take time to understand the charges, so that you can manage the risk and boost your real estate investment prospects.