Imagine you have stumbled upon an exciting real estate investment opportunity. You want to build a property on your land or you want to acquire a lucrative residential or commercial property. The only thing that hinders your objective is financing.
You have approached leading financial institutions but none is buying your idea. Who do you turn to? This is where hard money lenders come in. Learn what these organizations and individuals do and how easily they can fund your real estate project to fruition.
Introduction to Private Money Lenders
In the not-so-distant past, the image of hard money lenders was shady and often controversial. Some unscrupulous lenders used predatory approaches to entice real estate investors with risky lending terms. They would give finances against properties as collateral with the objective of foreclosing on the properties when the borrower fails to honor repayment terms.
However, the hard money lending industry has lately managed to shake off its once negative reputation. Lenders have realized the huge potential especially in real estate properties that sit in prime areas. Today, hundreds of real estate investors opt to finance their projects through alternative funders, thanks to the ease and convenience involved.
Defining Hard Money Loans
In general terms, a hard money loan refers to funds advanced to a real estate developer on the short-term. These are loans given by a private investor (or pool of investors) as alternatives to conventional loans from banks, microfinance companies and other financial institutions.
In most cases, the repayment term of a hard money loan is 12 months. However, individual lenders can negotiate this duration to suit the interests of individual borrowers. Depending on the size of real estate project, some investors could negotiate for the loan term to be extended to 2-5 years.
The rules of hard money lending are flexible. As an investor, you are more likely to qualify for the financing if you have substantial down payment. However, this is not to say that eligible investors without a down payment do not qualify.
General Terms of Hard Money Lending
Your real estate investment (or proposed investment) largely determines the terms of your hard money loan. The more lucrative an investment is (or promises to be), the higher loan amounts you qualify for. Properties that have high returns on investments usually attract higher loan amounts.
Lenders of hard money loans are more interested in the value of your property. Although some will have a look at your credit score, this is usually not a determining factor. When banks have declined your real estate loan application due to poor credit scores, hard money lenders often approve your eligibility.
Just as the loan amounts are defined by the property investment in question, so are interest rates. Rates can be as low as 5%-8% on the amount loaned or as high as 10%-15%. It is your duty as a borrower to do your homework.
Compare the rates from different lenders near you and then settle on the most preferred. Some lenders may use third-party companies to value your property. For this and other reasons, ensure that you know all interest rates, charges and fees before signing the dotted line.