Hard money loans are essentially a specific type of loan financed through a private lender through which a borrower uses physical collateral to support the loan. These types of loans can be helpful for a real estate professional looking to succeed in the industry.
Let’s look at some common questions about hard money loans and how they work so you have everything you need to be successful as a real estate investor.
How Much Collateral Do I Need?
Many hard money lenders ask that you provide physical collateral for your loan in return for funding your project. Oftentimes, investors will offer their real estate projects as collateral for the loan they take out with hard money lenders.
The private lender considers the project’s cost and how much it will be worth once it’s sold when determining your collateral value. Depending on how much you need to borrow, the lender will provide an estimated value of how much collateral they’ll need to lend you the financial means.
How Much Money Can I Borrow?
While it may seem easy to simply ask for money you need for a project, no matter the number, that might not always be the case when working with hard money lenders. Some lenders may establish maximum and minimum limits on how much they’re willing to fund, so each lender will be different.
You’ll want to calculate the after-repair-value (ARV), which is the monetary value of the property after being renovated, repaired, and upgraded. This number will vary for each property you invest in, but you need this number to determine how much to ask for.
Ensuring you have all calculations figured out before meeting with your lender can make the process much smoother for both parties.
Are There Any Upfront Fees?
Similar to college application fees, a hard money lender may ask you to pay a specific fee to apply for their services. In addition, there may also be hidden costs such as appraisal and document fees, so this is a vital question to ask before working with a hard money lender. A lender might charge extra fees to put together a loan for you as they work hard to get you the best deal, so they ask for compensation for those efforts. Keep in mind that these fees may emerge in different ways, such as:
- Flat total fee
- Percentage of the loan amount
- Combination of the above
Are Hard Money Loans Safe?
Even though it seems like you’re taking a risk by going to a hard money lender versus traditional banking, they’re the ones putting themselves at risk in order to fund your project. You must remember that private lenders are financing investments in properties that haven’t been fully renovated yet.
Hard money lending is quite the opposite from how they’re portrayed in movies. The key is researching which lender is right for you.
What Do Interest Rates Look Like?
Since hard money lenders often risk their resources to fund your project, they may charge higher interest rates than traditional lenders.
For example, if a borrower defaults on their loan, the lender is forced to foreclose on an incomplete property, affecting their business, reputation, and financial standing.
Interest rates will also differ between different lenders you team up with, as each lender has their own unique resources, network, and loan authority.
How Do I Prepare for a Meeting/Interview?
Similar to a job interview, you want to be as prepared and knowledgeable as possible about the project you’re asking lenders to finance.
For example, what is the turnaround time of your fix-and-flip project? Does your team of collaborators have a solid reputation?
Establish a portfolio showcasing your financial history and proof that you paid loans back on time, have positive relationships with previous lenders, etc.
Preparing the answers to these questions with detailed examples may increase your chances of getting approval on your loan.
Furthermore, your meeting may not be all about business; try to make it personal and find opportunities to talk with them on a similar level. Be yourself in the meeting.
What Types of Funding Do You Provide?
Hard money lenders provide funding for many different projects, including:
- New residential construction
- Multifamily renovations
- Cash-outs and refinance
Many lenders try to stick within a specific range of purposes they fund, so be sure to find out what type of funding your hard money lender can provide for you.
Do You Only Lend in Certain Geographic Areas?
Like the type of lending hard money lenders provide, you’ll also need to know if they stick to a specific geographic area or are comfortable working with borrowers in different locations.
Many traditional banking institutions only work with borrowers in their local market, but private lenders may operate differently based on their own guidelines.
But it’s essential to keep in mind that even if a lender finances projects nationwide, they might not be an expert in those specific geographic areas. The key is finding a hard money lender that offers services in a wide range while still providing their expertise and knowledge within that market.
What Does the Application Timeline Look Like?
Many real estate investors prefer to work with private lenders due to the speedy process. Traditional lenders may take several weeks to approve your loan, or longer if there are any issues or obstacles during the process.
Hard money lenders are known for their fast and less restrictive application and approval process, which is vital for real estate professionals. You can apply and receive your loan within a few days to a couple of weeks.
Do You Have References for Your Services?
As with any service you decide to purchase or utilize, performing thorough research before moving forward is always a good idea.
Asking your potential hard money lender if they have references or if you can speak to previous borrowers isn’t a bad thing; it ensures you make the right decision. If the lender is offended or doesn’t want to provide references, that may be a bad sign and an indication that it’s time to keep looking for other lenders.
When looking to finance your next project, be sure to check out hard money lenders in Oklahoma City that can help you get the job done.
These common questions about hard money loans and how they work will be your guide in determining which direction to take in your real estate career.