A hard money loan is for a short term since it happens to be a private loan – which can only be given for 5 years. Private investors and their foundations, instead of a bank or a credit union, finance loans of this type. It is erroneously considered to be high-interest.
In fact, deciding if the loan is more expensive than the money a borrower is getting is easily done. The amount a borrower will receive is based on the collateral they can offer. Usually, though, its entire value isn’t used. Instead, the value of the loan is calculated using a loan-to-value ratio.
Situations suitable for hard money loans financing
A hard money loan is ideal when a borrower is looking to:
Repair the property and then flip it
Get a construction loan for land that they will sell after building on it
Prevent there being a credit risk being the reason why they won’t be getting a loan
Act quickly for a real estate investment deal but don’t have the money to do so
Find out top hard money loan tips that make home refinancing easier in the Trump Era!
The life of a hard money loan
Whether you have taken out a residential hard money loan or a commercial one, they are likely to be set up for short periods, i.e., between 12 months and 24 months to 5 years. Compare this with a traditional mortgage from a conventional lender such as a bank – which can last for 15- 30 years —and it seems too short! But a borrower can use the short loan life to their advantage. They can take that time to complete the repairs or upgrades and then quickly sell the property for a profit.
Just as a bank would, a hard money lender will conduct due diligence when they first get an application from a borrower. That means, yes, they will perform a credit check. To understand a borrower’s financial position, the lender will need to know if an investor has a low credit score, outstanding IRS tax liens, or any foreclosures in their past. But this is an industry norm because knowing the track record of an investor will assure the lender that the former can pay back the loan.
If you find a lender who doesn’t bother checking your credit, do one yourself but for them! After all, somebody who isn’t worried about potentially exposing their balance sheet to risks shouldn’t be trusted. Make sure that they are financially sound and reputable before borrowing from a hard money lender.
The required credit score varies from project to project. For instance, if you want to invest in a fix and flip project, your score should be 600 or above. When that isn’t the case, unlike the bank, a hard money lender won’t just show you the door. They’ll look for alternatives that will be feasible to both parties. For instance, they may suggest that you partner with someone with a higher credit score. The strength and uniqueness of a hard money loan is the degree of customizability it offers to borrowers!
Hard money loans and the big three – bankruptcy, IRS tax liens, and foreclosures
If you have one of the big three defacing your credit rating, you can forget getting approved for a bank loan. However, hard money lenders won’t necessarily consider the trifecta to be a deal-breaker. Here’s why: they are willing to understand the circumstances that led to the financial debacle. Assure them that they won’t happen again and you can get yourself a loan!
Banks will usually not think twice about refusing you a loan if you have a credit score that is below a certain point. Hard money lenders won’t let your credit score exclude you from investing. In fact, most of them will work with borrowers who have a low credit score. If your scores are really low, the lender will be taking a risk on you when they give you the loan. So, they will work out a solution with points and rates that provide insurance against such a risk. Alternatively, they will agree to a larger down payment.
Investors who are looking to increase the likelihood of getting their deal funded, pay attention. Pen down a document that describes the reasons why your low credit score is low. Include in the letter an exit strategy that you have readied and planned for. Assure the lender you will come through and they will work with you!
Remember, hard money loans are a good way of financing real estate deals. Just make sure that you are fully committed to seeing your real estate project through before you get one!