In the 1950s, the term “hard money” was coined to refer to loans based on property assets rather than credit. Usually, the lender is a private investor rather than a bank or other financial institution.
These types of loans are the preferred financing option for house flippers or deals that are expected to yield returns quickly. This is because they offer convenience and flexibility. The borrower’s real estate is used as collateral for the loan. Depending on the loan amount being issued, the repayment term can range from one to two or more years.
If done well, house flipping is an enriching venture. For you to earn maximum profit, the financing option you use matters. Here are tips you should consider when choosing a hard money lender.
Essentially, when taking up a hard money loan, your property is on the line. Therefore, it is vital to ensure that the lender is licensed before taking private money loans. A genuine hard money lender will be licensed by their state’s Department of Housing and Real Estate.
Also, enquire about their affiliations with organizations such as the Nationwide Mortgage Licensing System and Registry. Request for a physical copy of the license and scrutinize it.
Once you are satisfied with their registration status, visit their website and any other online presence they may have. This will help you gauge their professionalism, and you will be able to see reviews from previous borrowers.
Confine Your Search to Local Lenders Specialized in Private Money Loans
The compliance requirements and process of servicing hard loans are complex and require an expert conversant with all the intricate details. Such specialists know how to structure the loan in a way that will suit both the lender and borrower. As such, restrict your search to institutions that specialize in hard money loans.
Before your property is accepted as collateral, hard money financiers will conduct their inspection. As such, it is better to choose a local lender as it will be more convenient for them to do the inspection.
Though there are private money lenders for real estate with branches throughout the nation, they’re not as flexible as a local institution. They may also charge you for the expenses they incur for the property visit.
Ensure that you research several lenders and compare their terms. The interest charged for hard money loans is usually 10-15%, and there are no administration or loan processing fees.
Do Not Compromise on Transparency
At any given point in the loan process, you must be fully aware of what’s going on and have access to information. Unscrupulous lenders will keep you in the dark and try to tie you to terms that you did not agree to.
Ensure that the hard money lender follows all the published loan guidelines. Be keen so as not to fall victim to lenders who entice borrowers with rates that are not availed in real lending situations.
The Extent of Your Financial Needs
Before you apply for any hard money loan, assess your needs, and determine the amount of money you need. Taking up a more substantial loan amount than you need, will only eat up your profits as the interest to be repaid will be higher. Conversely, if the loan amount is not enough to meet your needs, you may need to seek additional funding. This may also delay the project.
As you make a loan application, have the following information ready for your lender.
- Address of the asset
- Purchase price of the property
- Budget for renovation
- Asking price for the property after renovation
- Information that could affect the deal such as closing date
It’s the little details that separate successful house flippers from those who struggle. A great way of tipping the scales to your favor is by working with a hard money lender offering favorable terms and experience to guide you along the way.