Many people think that hard money loans are universally unregulated. Since their underwriting standards seem a bit relaxed, you can’t help but ask yourself, "Are hard money loans legal?" Just because a hard money lender overlooks your creditworthiness doesn’t mean the deal is adversely risky.
Truth is this short-term loan can save you when you need a quick financial fix. A perfect hard money loan example is a fix and flip deal. It is also ideal when you are looking to secure a real property or construct a building.
Hard Money Lending Regulations
Even though hard money loan interest rates are set by the involved parties, there are certain regulations that the lenders must follow. The regulations touch on the payment period, taxes, interest rates, and the fees.
Hard money loans are not regulated by the federal government. Rather, every State provides its own protocol through the Department of Real Estate.
Anyone with a hard money lending business is required to have a real estate broker license. Depending on the statutory laws, additional licenses may be needed. Be certain to familiarize yourself with the State laws, regulations and requirements for hard money lending in the State where you will be operating in. Make sure that the lender you choose to do business with complies with all legal requirements.
It is also a good idea to check lender's credibility with the Better Business Bureau. While there is no guarantee, there is a good chance that if the lender is not following proper protocols that complaints have already been filed.
A securities license is not a stringent requirement for hard money lending. Not unless the loan is a security offering syndicated to a group of investors. On the other hand, a cross-State transaction depends on the respective rules of both states. So if you are not from the same State as your lender, jurisdictions pertaining to loans from both States will apply.
Hard Money Loan Requirements
Before you approach a hard money lender, make sure you understand the terms and conditions. There are 3 basic requirements:
- Equity: A real estate property to act as collateral
- Exit strategy: How you are going to repay the debt
- Cash reserves: The financial strength to make monthly payments
The hard money loan term is shorter compared to traditional financing, ranging from a few months to 5 years. Note that a traditional mortgage term can go up to 40 years.
Due to the quick turnaround time, hard money loans are suitable for investing in real estate long enough for the value of the property or investment to appreciate. Then, you can sell the property and repay the full amount preferably within one year.
Hard money lenders work differently. But there’s one warning signal you must watch out for: upfront fees. If you are asked to make an advanced payment, demand for a full disclosure of the fees before you sign the contract.
Make sure you understand the interest rate and other charges involved. Lastly, examine the lender’s means of communication. If they seem to avoid talking in person or over the phone, run from their deal. They should be willing to get into an office with you and pick your call anytime.