The real estate ecosystem is incomplete without hard money and private loans. Real estate investors can conclude a deal quickly with access to quick cash, and private lenders outside of the conventional banking system typically provide much more flexible terms. That’s where hard-money loans come in.
Your bank may not lend to you if you have negative credit, no credit, no proof of income, or a bad debt-to-income ratio. Whatever the reason, as a real estate investor, you should finance your next deal using a hard money loan. Although employing hard money rather than conventional loans can be a quick fix for investors who need cash immediately, some still have reservations about doing so. This post will examine some risks associated with hard money loans and provide other valuable information.
What are the Risks of Hard Money Loans?
Hard-money loans will always have rising interest rates than traditional bank loans. Due to the lender’s heightened risk and the borrower’s convenience in having quick access to funds, the interest rate is higher. Due to several variables, hard money loan interest rates often range from 9 to 15%. In addition, a percentage of the loan amount is charged as a loan origination fee by hard money lenders, known as points. Most lenders charge between two and four points, although some charge significantly more under certain circumstances.
Borrowers frequently seek hard money loans for projects involving distressed properties that banks are unwilling to touch, in addition to different lending criteria in which credit score is not a significant issue. In addition, hard-money lenders offer higher interest rates because they take on more risk than banks.
Low loan-to-value ratio
The loan-to-value ratio (LTV) evaluates the relationship between the size of a loan and the value of an asset acquired using loan proceeds. Hard money loans have a lower LTV since they use the asset as collateral, requiring borrowers to make a larger down payment upfront. Hard money loans often have a maximum LTV of 70–90%, and the lender will probably have the interest rate, amortization schedule, penalties, and points all set up to be advantageous to them. You can learn more about this through a local hard money lender in Baltimore.
Changes in the Real Estate Market
Because they frequently rely on selling their investment property to repay the hard money loan, any significant changes in the real estate market might put borrowers in a pickle. Borrowers may receive far less than anticipated if the sale doesn’t bring in the intended sum. Hence, there is a risk whenever the real estate market declines.
3 Good Reasons to Apply for a Hard Money Loan
The presence of quick acceptance and funding
One of its main benefits is the quickness with which lenders approve and fund a hard money loan. In many circumstances, approving a hard money loan can take as little as one day. The hard money lender will take into account the property, the amount of equity or down payment the borrower will have in the property, the borrower’s experience (if applicable), the property’s exit strategy, and whether or not the borrower has sufficient cash reserves to make the loan payments on time each month. Providing that everything in these categories is reasonable, approval is likely to be given.
Hard money loans get processed far more quickly than bank loans, which will surprise real estate investors who have never utilized them. Hard money loans can be funded in 3–5 days if necessary. In contrast, it takes a bank to fund more than 30 days. Many real estate investors in escrow whose initial lender bailed out or did not deliver have seen a savior in this quick financing. This is the ideal time for a hard money lender to intervene, offer speedy funding, and keep the deal.
When other sources of capital are unavailable, hard money loans are the “Go-To” loans
Private money lenders provide hard money loans to investors for projects that banks and other traditional lending institutions are not interested in supporting.
The “Fix and Flip Projects” are the best illustration of this. Real estate projects are known as “fix and flips.” They are those where investors purchase a property and employ a short-term hard money loan to perform repairs and upgrades to the building, sell it off within a year, and make a profit.
Commercial hard money loans come into play precisely because banks and other traditional lending institutions do not consider such repair and flip ventures, allowing thousands of investors to profit handsomely from such deals.
This was only one illustration. In many of these situations, where banks have little interest in lending, investors benefit from hard money loans.
Banks and other traditional lending institutions often refuse to provide loans to investors who need them for brief periods, like 12 months, as doing so does not fit into their business model. Instead, they are more interested in providing loans for extended periods, even if it means charging higher interest rates. So, hard money loans are undoubtedly an excellent option if you need a quick loan.
The conditions for hard money loans are less stringent than those for traditional loans
Hard money loans have a short list of prerequisites for qualifying, and a hard money loan lender may typically approve and successfully fund the loan quickly. In contrast, banks have a long list of loan eligibility standards that are sometimes simple for loan borrowers to meet.
Hard money lenders merely look for fundamental needs, such as the amount of equity the borrower has in the property, the amount of cash on hand that will allow him to make the monthly payments, and a few exit alternatives that ought to be sufficient.
Banks take a long time to approve a borrower’s loan request, despite having many loan eligibility conditions. One of the critical criteria that most banks seek for loan eligibility is having a high credit score.
In addition, banks and conventional lending institutions have many problems that amount to warning signs and prevent banks from even starting to assess the borrower’s loan request. Loan modifications, short sales, and bankruptcy are a few examples of such problems. Also, banks reject loan requests from investors with several unpaid mortgages.
Hard money loans are the “Go-To” loan in many situations since they are exempt from an unending list of such restrictions and limitations.
Even with the risks involved, matching the benefits of hard money loans is possible. Finding a trustworthy lender is a brilliant idea. Use the tips above to reduce the risks as much as possible while utilizing the possibilities of hard money loans.