Forbes Magazine estimates that the majority of the estimated $17 to $18 billion dollars in loans for home flipping in 2016 came from private lenders. Hard money loans are private loans made to real estate investors who seek short-term borrowing opportunities in order to fund projects such as construction, short-term and bridge loans as well as home flipping projects.
These loans come at higher interest rates but solve an under-served niche in the lending industry by helping people who need fast, short-term loans or those who cannot qualify for a traditional loan.
Choose Your Lender Carefully
Forbes Magazine suggests that borrowers very carefully vet their potential hard money lender. Your lender will be the one who will do it all – underwrite the loan, fund it, manage and service it. They must have local experience in your real estate market, experience in construction and proven experience lending to flippers and other types of investors. Of course, also check out your potential lender with the Better Business Bureau.
Prove You Have Excellent Collateral to Offer
The Balance Small Business explains that hard money lenders are not concerned with your creditworthiness. They are looking at the collateral you have to offer. You have to provide great collateral in order to receive a hard money loan because the lender will only be interested in loaning you money under the scenario that they can foreclose and easily sell the property themselves for a profit if you default on the loan.
Thus, your case will need to be how the collateral you are offering up is sufficient to warrant their investment. If the project does not have enough collateral to satisfy the investor, you may need to offer additional collateral from your present personal assets. The lender is looking primarily on the after-repair value, or ARV.
Save for the Down Payment
Unlike traditional loans, hard money loans require a substantial down payment. According to The Balance Small Business, typically the expected down payment amount is about 30 percent of the property’s appraised value.
Factor in Interest Costs
The Balance Small Business explains that hard money loan borrowers must factor in the higher interest rates into their projections. Typically, interest rates are from 12 to 29 percent, with the shorter loan term, such as one to five years. Borrowers must also take into account points, which can be 4 to 8 percent.
If your project cannot succeed under such terms, you will need to look elsewhere for loan funding. If you have done your homework on your acquisition and how you will leverage your short-term loan, projects such as construction borrowing and home flipping can thrive, even under the harsher conditions of a hard money loan, since the loan is for a short term.
Request Your Terms
Since your lender is going to carry out all parts of the loan process and has latitude in determining the terms, you need to consider if you require special loan terms. For example, you may request an interest-only hard money loan with a huge balloon payment at the end, when you have projected you will have sold your acquisition.
Hard money loans can help real estate investors desiring speedy funding or funding in cases where traditional banks will not loan. As in any loan, you have to do your research and come to the table with a proposal that will whet the appetite of your potential hard money lender