When it comes to loans, you can find a loan for just about anything you can think of. You can dive even deeper than that, as different places offer different terms and options for you loan needs.
If you’re looking at jumping into the real estate business, you should know what a hard money lender is. While there are plenty of places to check out for a loan, such as your local bank or online lenders, a hard money lender is another option that is essentially exclusive to the U.S. and Canada.
Hard money lenders are quite a bit different than your banks or other lenders, so below we’re going to dive into a few things you should be aware of.
Terms Are Very Different
Your typical home loan lasts about 30 years, and you can choose a fixed or variable mortgage. You pay off the principal with interest over that amount of time until it’s finished. Pretty standard all the way around
Hard money lenders, on the other hand, offer very different terms. A loan from a hard money lender typically has a 12 month term, while some can be extended up to five years.
Instead of paying off the principal each month, you’ll be paying off the interest until a balloon payment comes at the end. The exact terms are negotiated between the borrower and the lender. This gives you some flexibility, as you’ll be able to negotiate adjustments and specific terms more so than you’d do with a bank.
In addition, hard money lenders are going to be looking at the property value you intend to buy instead of looking at your credit history. While your credit history is important, it’s not going to be the be-all, end-all that it might be with some banks.
Interest rates will be higher due to the short-term state of the loan and the loan-to-value ratio is going to be lower than typical mortgages as well. Expect to see something around the 50-70% range as opposed to the 70-90% you’d find with typical mortgages.
The Processing Time is Faster
If you’ve ever had to go to a bank for a loan, you know that there are tons of documents to turn in and the process may take a full month, or longer, to get approved.
With hard money lenders, you can be approved within as little as five days. On average, it takes about a week but it’s still a much quicker turnaround, especially if you need the money fast.
Hard Money Lenders Work With You
If you go to a bank or other vendor, after approval you’re only likely to hear from them about monthly or yearly statements. Other than that, communication will be at a minimum.
Hard money lenders, on the other hand, can be proactive partners in your real estate business. Since they themselves have a direct interest in your property, they may help connect you with contractors, real estate agents, or even people who could join your team down the line.
If a lender has experience with remodeling and flipping houses, that could certainly help you with the details or issues that undoubtedly will arise down the line.
It’s Best to Go Local
Because of the lender’s connections and interest in the property, it’s better for you to find someone that works local. Not just because they’ll be more invested, but because they’ll be able to offer more in terms of connections and future help.
Plus, you can scour your own personal network to find someone that has worked with a hard money lender before, automatically building a bit of trust between all parties involved.
The Market May Temper on Hard Money Lenders
Right now, the real estate market and economy is booming across the nation. We’ve started to see some signs of struggle, as evidenced by the manufacturing market. Just when and how this may affect the real estate market is tough to predict, but the good times may not last forever.
Looking to the present, hard money lenders have become more and more popular amongst real estate investors over the last half-decade.
That has been a double edged sword, because their use is becoming more mainstream but that also means they may not have the funds to supply enough loans. Be diligent when researching hard money lenders in order to make sure your lender will be able to support you through the partnership.
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