Are you unable to find a conventional loan with a bank? There are several reasons why your bank is rejecting your loan application e.g. poor credit score and employment issues. Fret not because there’s another option, that is, private or hard money.
The number of private money lenders is on the rise. So, relax and take a breath. If you get it right, private money can be one of the best financing solutions you’ll ever find.
A conventional mortgage is not always right. In worst cases, the existing property is confiscated and you’re left with nothing. Those who experience this unfortunate situation end up homeless for a while. You too can find yourself in such a tragedy if you don’t make the right decision to finance your real estate.
Have you decided on what property you want to buy after acquiring a hard money loan? Before we congratulate you, there are 4 things we want you to keep in mind.
Before signing a deal with your private money lender:
1. Ask for prepayment fines and other consequences of violating terms and conditions
Private money lenders do not just give out loans to benefit the borrowers. They also want to gain through interest. The interest is their source of income. So, when you clear the loan earlier than expected, you may incur a prepayment penalty because the lender will be losing installments.
Now, before you sign a deal, always inquire if there’s any prepayment penalty. Many times, no private lender will disclose this unless you ask. There are cases where investors pay hefty fines because of repaying the loan in advance. Also, read the fine print to the end before putting down your signature. We highly suggest seeking professional legal and financial help before signing anything or taking out loans of any kind.
2. Cultivate good relationships with private lenders
If you are an aspiring real estate investor, you must know how to properly execute your decisions at the right time. With a friendly private lender, you will gain a lot of knowledge as far as real estate financing is concerned.
As a matter of fact, private money lenders are some of the best sources of information when you need a loan processed in a fast and convenient manner. Because they work in the real estate market, they understand the nitty-gritty of property investment and they want you to succeed as much as you do; so they can have their capital paid back.
You can solicit their help when you are not sure of the right choice. They can tell you who will turn away and say no to your deal in the end. That way you won’t waste much of your valuable time. Don’t you like getting invaluable honest opinions?
3. Know the rates, points and fees
Before approaching private money lenders, play your part well i.e. find out how much interest they charge, how many points they charge (percentage of the entire loan amount due upfront as a fee) and what other fees they may include. Some private lender charge outrageous rates and you might fall into their trap if you don’t have sufficient knowledge on the prevailing market trends. You don’t always need to make mistakes to learn a lesson. You can learn from other people’s blunders.
4. A low-interest rate is not always the best deal
Let not your borrowing decisions be founded only on the rate of interest that a private money lender charges. Lower interest can be compensated with a higher administration fee or points in the case of a hard money loan.
If the interest rate of one hard money lender is extremely low compared to the rest in the market, something fishy might be cooking. In most cases, such money-lenders include an unfavorable clause which you are likely to forego in the beginning. In an example, the lender might include a serious penalty on late payments
Like any other business people, hard money lenders have personal interests and they want to make a profit at the end of the day. So, do not be fooled by a low-interest rate. Ask yourself why you are being charged ridiculously low rates. It could be bait! Or, it could just simply be a better deal - and this is why it's key to try to get as many loan offers as you can before deciding on one.
One reason a lender may charge a lower rate is because they are what is known as a direct lender; meaning they lend their own money. This is different from lenders that manage a fund pooled by outside investors.
Every financial decision has its benefits and drawbacks. Securing hard money loans will not take away all the risk involved with taking loans. If you are not careful, there will be consequences such as paying more than you should.
As explained, there are grievous mistakes you must not commit when working with private money lenders. Keep this information on your fingertips so you don’t fall prey to the most common borrowers’ mistakes.