What is a Hard Money Lender?
To understand who or what a hard money lender is, it is important to first comprehend the concept of these types of loans, which are basically a form of alternative financing obtained through private investors or individuals. These are short-term loans that are secured by the real estate asset for which the loan is made. The average loan period, particularly for a rehab, is typically 6 to 18 months. In recent years, borrowers have opted for loan periods up to 3 years. It is important to note that hard money lenders more heavily base their lending criteria on the value of the investment property, or collateral, rather than a person’s credit history.
These loans are a bit more costly but are a great alternative for when the banks say, “no.” Traditional banks have more stringent credit standards for lending and are often less likely to take on the risk for certain kinds of investment projects. These are two reasons hard money loans are more costly with higher rates and fees. These lenders are accepting a risk that community banks might not.
It is important to note the various kinds of hard money lenders. One might be a high net-worth individual who sees these loans as a great investment opportunity. Other lenders are comprised of a mortgage fund or group of investors, for which the amount of capital invested by an individual will coincide with their rate of return. Another option would be mortgage brokers with funds sourced from multiple trust deed investors who look to invest in loans. The borrower will work with the mortgage broker. Thorough research will help define the best lender option.
What Makes a Good Hard Money Lender?
It might be tough for new investors to evaluate a potential hard money lender. Borrowers should make sure they are comparing apples-to-apples since many of these lenders offer a variety of loan programs with varying rates, fees, and other costs. Here are some indicators to consider when assessing a lender.
1. Honest rates. Lenders should be upfront with their fees. It is wise to do an internet search to find the most current rates. Presently, rates are in the 7.5% to 15% range. If a lender offers what could be considered a low-ball rate, the borrower might get hit with hidden fees. Be skeptical of deals that seem “too good to be true,” as they are non-existent when it comes to financing.
2. Experience. The best money lenders understand the industry, either because they have developed projects themselves, or they have originated enough loans to understand the needs of the borrower. Additionally, professional lenders help investors navigate through or away from risky deals.
3. Transparency. Is there information about the company on their website? Do they share prior deals and testimonies from previous clients? Another good sign is when lenders post pictures of management or other team members.
4. Good Standing. Always verify the rating with the Better Business Bureau, even if the lender is a referral from a friend or colleague. Why not go with a lender who has an A rating? In addition, check to see if the lending company is a member of an industry association or network of lenders.
How to Find a Reliable Lender
What is the next step, after taking into consideration the qualities of a good lender? How do you find one that is reputable? Networking is key. A smart investor knows to establish connections with other like-minded investors and should have a well-developed list of contacts to drawn on for information and other resources.
Anyone looking to create a network should explore a local real estate investment association. Most large cities have more than one group and quite often the same investor will be seen at multiple events. These groups usually have monthly meetings with informative presentations and members in attendance who may well be valuable sources for referrals.
Not much of a people person? Another option to find a lender is to check with a realtor group. While their typical client might prefer working with a traditional bank, many realtors work with real estate investors who might be a good referral source.
Next Steps in Working with a Lender
Once a borrower has researched, vetted, and selected a potential money lender or two, what is next? First, schedule a meeting. This provides the opportunity to learn more about their lending specialty and get a better grasp of their exposure working with borrowers. Inquire about their previous involvement or familiarity with rehab or development projects.
Be prepared to discuss the particular deal in question and gauge whether the lender’s products offered fit the deal. Factors used to make that decision are acquisition price, renovation costs, after repair value, and estimated days on the market. Plugging in these numbers helps determine if working with this lender will be profitable.
Next, it is the lender’s turn to evaluate the borrower by reviewing the complete application. Once the lender approves the deal, it is time to sign the contract. Consulting with a lawyer is always prudent, especially when working with a new lender.
Closing the loan is the final step in the process. Once the loan is approved, the lender orders an appraisal. Most loans close within a day or two of the appraisal being completed, and it will not take long for funds to be released. Unlike a traditional bank, hard money lenders will personally handle the loan application and quickly move the process forward. This means funds will be made available quickly. The ability to close loans quickly is one of the best benefits of hard money financing.
Whether a borrower has no credit history, some negative credit items, or simply bad credit these loans are great options. And, when investors need funds quickly to finance a deal, a hard money loan can be the best option provided there is a real estate asset to provide as collateral.
For more lending information, go to https://www.rbimortgages.com/