There’s no doubt that hard money funding is gaining more attention as more and more people are turning to it as an alternative to source quick funds for their real estate investments. However, for those who know little to nothing about it, they will be hesitant to proceed since it’s different from the conventional lending institutions they are accustomed to.
It’s a good idea to find out as much as you can about hard money funding well before you start the process and a good way to go about this is by asking questions. There are many avenues both online and offline to get the answers you seek and doing that will make sure you understand the workings of this unique industry. Also, you’ll be in a better position to choose a lender you’re confident and comfortable working with. This will eliminate worrying and prevent any unpleasant surprises as the transaction progresses.
You can discuss anything you don’t understand about the process with your chosen money lender but make sure each question is answered before you proceed. Even experienced borrowers know that every lender and project is different so clarify every point with them first.
Below, we have some of the most common questions newbies have about hard money lending. As you go through them, take time to note any additional concerns that crop up in your mind as you read along. You can discuss them further when you are face to face with a lender.
How Do Hard Money Loans Work?
Let’s start with the basics of hard money funding. As we mentioned before, each lender will have their own specific way of doing things but the norm in this industry is that the lender will base their decision to lend, or not to lend, on the value of your proposed real estate project.
This is unlike the banks who are more concerned with your finances, assets, income and credit history. In this case, the lender is concerned with the profit potential of the project and will base their decision on that projection.
If your loan application scales through and is approved for funding, you can expect the money to be wired in a matter of a few business days or at most a week or so. This surely beats the traditional banks where you may not get a decision till months after filing your application.
Be careful to choose a reputable and experienced hard money lender to work with and feel free to ask for their references from past clients. Also, check them up online as they should have a website with some reviews and testimonials. Be wary of any lender that cannot show you proof of their track record of success.
What Kind Of Rates Are Applicable With Hard Money Lenders?
The rates on your loan will vary and though they may not be able to give you an exact figure at the time of your application, they should be able to state a ballpark figure to guide you. The rates will eventually be determined by other factors as the loan application progresses.
How Do Hard Money Loan Rates Compare To Banking Loan Rates?
Expect the rates to be higher than what obtains with traditional lending rates. This is because the risk is higher since the lender bases his/her decision to lend on an asset rather than credit score and income etc. In addition, you need to factor in the speed with which the funds are going to be released to you.
Who Funds The Hard Money Commercial Loan?
The loan may or may not come from the hard money entity you identify with directly because they may broker it out to another company.
The process will be faster and easier with a direct deal but whatever the case, ask ahead if you think this will be an issue for you.
Should I Expect Other Fees As We Progress?
Experienced borrowers will be wary of unexpected fees and charges that always seem to crop up at the end. Ask ahead and try to get your lender to commit to the costs you will expect to pay in total. Apart from third party charges for things like title insurance and legal fees for which your lender is not directly responsible, they should be able to tell you what to expect for everything else.
How Soon Will I Get the Funds?
Hard money lending usually works faster than traditional funding, that’s one of the main attractions. But, note that this will vary from one lender to the other. Generally, they will give you an idea about how much time it will take even if they can’t give you an exact date. You can get a better idea of an exact date once some major hurdles have been crossed like title insurance and property appraisal.
Lenders are careful not to unduly delay transactions as they know real estate deals are time-sensitive. As a result if this, they will work very hard to create a smooth transaction and get the funds to you as quickly as possible especially if you let them know the timeframe you are working with.
What Loan Length And Terms Can I Expect?
Another feature of hard money loans is that they are relatively shorter than traditional loans and generally run from six months to about 36 months.
This is an important part of your loan and you should ask about this as soon as possible. Also confirm if it can be extended.
Other things to consider are penalties for defaulting, early payment, contravening any of the loan conditions, and so on. These are unpleasant issues to deal with but it’s always better you know in advance.
What If I’m An Inexperienced Real Estate Investor?
Even if you are an inexperienced real estate investor, you can find a lender that will be happy to work with you.
Some lenders choose to work with experienced investors only and that’s okay. Keep looking and you’ll find one willing to fund any borrower that meets their selection criteria. Many reputable hard money lenders will also be happy to work with you, as long as your investment proposal is viable and has the potential to be profitable. Don’t be discouraged if a particular lender turns you down due to your inexperience, you’ll soon find someone that is confident in you and your idea.
If you are experienced, you’ll be asked for proof of your past projects so have that information handy.
Once you have a list of proposed money lenders you want to approach, check out their websites for some information about them. You may find answers to many of your questions there. But don’t stop with an online search. Make it a priority to visit the lender in person before moving ahead. You’ll be able to decide whether you are comfortable working with them or not when you’ve met them in person and seen how they work.
Every lender will have their own way of working and this will be noticeable in how fast they release funds, the kind of reviews they have, their interest rates and son on. Rarely will you find one company that scores perfectly on all points. Just decide what’s most important to you, and your project, and stick to a lender that will make it happen.