New investors, particularly those who have been denied financing by conventional lenders, may think their options are exhausted. To the contrary, they may be perfect candidates for hard or private money lending. Unfortunately, there are a lot of misconceptions concerning hard money lending that will keep some borrowers from exploring this option. Let’s review hard money loans and how they might be a great opportunity for you.
What is a hard money loan?
A hard money loan is typically a short-term financing arrangement between you and a private investor using the equity in an existing property to secure the loan. The length of a typical loan is five years or less, with some lenders accepting terms up to 10 years. The borrower normally makes a monthly interest payment with a balloon payment at the end of the loan term.
The amount that an investor will offer is a portion of the value of the property. This is known as the loan-to-value ratio and can be from 50-70 percent depending on the investor or investment group offering the loan. The primary consideration for the investor is the value of the property, normally obtained via an appraisal, and the existing equity being used as collateral to secure the loan. Interest rates are higher than conventional loans due to the higher risk accepted by the lender since they normally ignore previous credit problems, foreclosures, or bankruptcies.
When should a hard money loan be considered?
Hard money loans are best suited for shorter-term transactions — land purchases, construction loans, bridge loans, property flips, investment properties, and so forth. Investors may not be interested in long-term financing which ties up their money for longer periods. A good rule of thumb is to seek hard money for situations where conventional banks won’t approve the loan.
Who should use hard money financing?
Anyone who has credit issues, foreclosures or bankruptcies, who are self-employed, or newly employed without a work history. It should also be noted that hard money can be available in days versus months for conventional lenders, making hard money a valuable choice when you are trying to secure a property quickly or start construction while awaiting other financing. Borrowers may also use hard money to secure cash against an inheritance or estate if they can prove they are the inheritor but probate has not cleared. For other situations contact AHL Hard Money Network and discuss your situation with us.
What types of real estate may or may not be good candidates for hard money loans?
Good candidates for hard money loans include multi-family residential, non owner-occupied single family rentals, commercial property, retail, land, or industrial properties. Hard money investors are not usually interested in financing owner-occupiedproperty due to government regulations requiring additional disclosures and other requirements better suited to conventional lenders. Owners seeking financing of their own properties are normally encouraged to work on clearing up their credit or other issues so they can seek conventional financing.
AHL Hard Money Network is always willing to discuss your hard money financing needs. The above guide is very general and cannot cover all loan situations, so contact us today if hard money financing is a good choice for your needs.