What is the first thing that comes to your mind when you hear about a hard money loan? Maybe some shady lender is waiting for its client in a dark alley? No, that’s not it or lenders always asked: “How do hard money loans work?” On the contrary, hard money loans are entirely different. It doesn’t involve anything shady. Hard money loans are for real estate investors requiring financial support for investing in real estate. You will not get these loans from traditional lenders, such as banks. Instead, private companies offer hard money loans to support short-term financing to real estate investors. If you are considering a hard money loan refinance, the best thing to do is to go for a hard money loan.

Understanding hard money loans

Hard money loans usually last between three months and thirty-six months. Real estate investors don’t tend to hold properties for long. This makes it easier for them to repay the loan quickly and make a significant profit from the deal. Most investors prefer flipping properties and selling them at a higher rate. It allows them to not only pay the loan back but also have enough capital to invest in their next property. This automatically lowers the amount they want to loan in their next project.

Investing in real estate does not have a surefire chance of getting a high ROI. What if the market is down for some reason? You may incur a loss after investing in a property. That’s why hard money loans come with high-interest rates. The volatility of the market keeps the investors and lenders on their toes. Anything can happen at any time. Hence, the lenders use the property of the investor as collateral. That means the lender will become the owner of the property if the investor cannot pay back the loan.

Hard money loan interest rates

The lender has the right to sell the property to make up for his/her losses if the investor cannot pay the money on time. Usually, the hard money loan rates interest may vary from 7.5 to 15%. The interest rate is high for first Revit-time investors or the ones that have a poor credit history. Hard money lenders always check the credit history of investors before transferring money. 

Some lenders also charge points to real investors for their loans. These points relate to origination fees that handle the loan’s administrative costs. It helps to mitigate the lender’s risk in case of defaulters. One point in the name of the investor means one percent of the total loan amount. The real estate investor pays for these points right in the beginning before initiating the loan. He/she can later pay a fixed amount of interest every month. 

Hard money lenders consider several factors before deciding the interest rate on a specific loan:

 

• Track record

What is your reputation as a real estate investor? Do you often take loans and pay them back on time? How many properties have you acquired and sold successfully so far? What is your overall credit score? The lender will inquire about all these things before providing the loan. It helps to reduce his/her risk to some extent. The idea is to lend money to someone who has more chances of repaying the loan in time. 

• Amount of down-payment

What is the approximate amount of equity you can provide us a down-payment? The more you provide as a down-payment, the more chances you have of paying a significantly lower interest rate. It means that you have the financial stability to repay the loan. The lender usually charges a lower interest rate from investors who put down more equity in the first place. 

• Property variables

Property variables mean the likelihood of the investment becoming fruitful in the future. For example, you take a loan of $10,000 to flip and sell a property. However, you didn’t do a background check of the neighborhood. It is a shady place and often has police raids. Do you think any sensible person would agree to buy the property in such a neighborhood? Moreover, do you think they will meet your asking price? In most cases, they won’t. No one would like to risk their lives and stay in a place that is a breeding ground for criminals.

What happens now? You cannot sell the property to anyone, and you cannot repay your loan. That’s why the lender asks a lot of questions about the kind of neighborhood, how much work the property needs to flip and sell, and similar other questions. It reduces the risks of running into a significant loss or tagged as hard money loans for bad credit. You and the lender will be in the same place if you can’t sell the property. It’s a bigger loss for the lender than you. 

• Investment plans

Hard money loans refer to loans for real estate investment. But you need to be specific about where you plan to spend the money. For example, do you want to construct a property from scratch or renovate various sections of a building? This gives the lender an idea about your investment plans. It helps the lender decide the interest rate accordingly.

Requirements to get hard money loans

Here are some tips for Hard money loan requirements:

Hard money loans are expensive. Most real estate investors use them as their last resort because they have to pay a significant amount of interest every month. Sometimes you cannot help but take the loan because of your poor financial condition. If so, make sure you fulfill the following requirements.

1. Cash in hand

Although the loan will cover most of the costs, it is still essential to have a significant amount of cash. Of course, all hard money lenders will not force you to make a down-payment, but most of them prefer down-payments to decide the amount of interest rate.

2. Real estate investment experience

Hard money lenders will not inquire about your personal credit score. Instead, they will check your real-estate investment credit history. It provides detailed information about your experience in real estate investment. Successful payoffs will mean you have more experience. This will affect your loan interest significantly.

Remember, lenders want to provide loans to investors they can trust. Make sure you have a repayment plan ready to sanction the loan easily at a low-interest rate.