Borrowers use hard money loans for investing in real estate such as commercial property. In contrast, a mortgage is usually reserved for your primary residence, has a formal application process and longer repayment terms. Hard money lenders -- typically private investors or small companies -- will sometimes lend money when a bank or traditional lender will not. The tradeoff of a hard money loan is a higher interest rate. When getting a hard money loan for investment property, you face the risk that the investment will not not turn a profit. Before attempting to borrow from a hard money lender, understand the payment terms and other lending criteria.
Do Your Homework
Inquire about the lender's history and terms before settling on a hard money lender. Hard money lenders use the property value to determine the loan-to-value. For example, a LTV of 65 percent means the lender will only lend up to 65 percent of the value of the investment home. Some lenders require that you fill out a credit application and provide income verification such as a W-2, pay stubs and tax returns. However, since hard money loans are for real estate investments, many lenders only use the property value and an inspection of the property as a basis for the loan.
Contacting a Lender
There are many hard money or private money lenders throughout the United States, so researching one near you is not a problem. The Internet directory Moolahlist.com lists lenders. Rather than settling on one or two lenders, create a list of lenders in your area. Use a lender familiar with the property values around the investment home. If you have a hard time locating a lender, contact a local mortgage broker who may have names of private money lenders. Having multiple sources of quick cash is a good idea in case of rejection. Obtain each lender's borrowing criteria to compare notes before settling on one.
Have a Plan
The purpose behind a hard money loan is to provide capital to acquire an investment home which you intend to sell for a quick profit. To this end, obtaining a hard money loan requires that you have a plan for selling the property, which includes making any repairs. Knowing exactly how much you need -- not only for buying the property but also repairs and maintenance -- prevents you from borrowing too much. Before requesting money, estimate ancillary costs, such as repairs, maintenance and construction costs, and factor these into your loan application. Provide sufficient detail regarding the investment home, including any supporting documentation, to improve your chances of receiving a loan.
Hard money loans carry higher interest rates than typical bank or commercial loans. A quick sale of the property is preferable, but this may not be the case in reality. You are responsible for making interest payments as long as the property remains unsold. You also face the risk that the property will decline in value or you will sell it for less than expected for a smaller profit or even a loss. In addition, the lender may foreclose on the property to recoup its money, leaving you with nothing to show for your work and effort.
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