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Things to Keep in Mind Before Getting a Hard Money Loan

Whilst some people can afford to spice up their home interior or garden using their existing savings most would be unable to purchase a property outright. As a result, they would seek a loan from a specialist company or bank. One popular option is called a hard money loan.

Hard money loans are usually given to people who need financing in order to purchase a house or property, when they could not obtain a conventional mortgage. In this article, we will discuss some important things to keep in mind before getting a hard money loan from an institution or individual.

Hard Money Loans – The Basics

Hard money lenders are often private individuals or investors who have a lot of cash to spare and who want to earn interest on it. The loan is usually used for an investment property rather than when you’re buying your own residence. The money is typically used for short-term projects or investments that require immediate cash flow. As a result, it’s hard to get a hard money loan approved if you are using it for your primary residence or long-term projects and investments.

A hard money lender might require an appraisal as well as a report by a home inspector before approving your application. The loan would be secured by the collateral of an asset, such as the investment property itself.

Use A Hard Money Loan Calculator

Get an independent appraisal of the property beforehand, to make sure it’s worth the loan you’re asking for. If you go online you can learn how to use a hard money loan calculator, and view some examples. Specialist websites can explain about the principal loan amount, interest rate and loan term – and the benefits of taking out such a loan.

Factors To Consider

Because hard money loans are short-term (typically lasting for six months), you should be clear on the repayment terms, i.e. will this be monthly payments or one lump sum at closing time (or both)? If it’s monthly payments, find out what the interest rate will be in the documentation, as well as whether there are any balloon payment clauses.  

If you proceed, make sure that you’re not borrowing more than two times your annual income, and be certain you can repay the loan in time.

What You’ll Need

Hard money loans are not easy to get. There’s a lot of documentation, and it takes some time to go through all the steps with your hard money lender. You’ll need a strong credit score in order to qualify for one of these types of loans. You should have at least $25,000 cash available for closing costs before applying. Be aware that there is no grace period before your repayments start coming out, so be prepared to pay back any funds quickly after receiving the loan.

You may have to pay a higher down payment because hard money lenders are more risk-averse. As the borrower, you must be able to provide collateral in the form of real estate or other assets that will be liquidated if you default on the loan.

The Drawbacks

Hard money loans are not for everyone – they can be expensive and risky so do your research first! It’s vital that you fully understand what you’re taking on before you sign the documentation. If you can’t repay your loan in time, you’ll lose your property as collateral. Hard money lenders expect that you’ll repay them on time or they can take legal action against you.

Hard money loans come with strict terms and conditions, so read the fine print carefully before signing on the dotted line. You need to be aware that the interest rate will be higher than other types of loans. You should find out if there are any restrictions on how much equity you can take from other properties or retirement accounts too. 

 

The Alternatives

There may be borrowing alternatives such as personal loans from banks or credit unions. If friends or family are willing to lend the money to you, you would not need to pay interest on your borrowing. Having said that, many relationships have been destroyed when people have been unable to pay back their loans in the time agreed.

Another option would be to sell your existing home and use that money for what you need. If you are moving into a new house, the bank may want to see proof of how much equity is in your current home before they will give you a mortgage on another property. This means selling it at market value and then having enough left over after all the fees have been paid, to get started with investing or purchasing something else.

The alternatives go on, and borrowing from an IRA can be very expensive if done without paying interest because of the early withdrawal penalties. It’s best to take financial advice before you conclude your financial arrangements.

Where You Can Go

Choose a hard money lender who has the right experience and qualifications. Take a thorough look at their website and seek client testimonials. Look at the interest rates, repayment terms/other fees, and do the math thoroughly. Don’t sign anything until you fully understand every last detail, and remember: no paperwork means no obligation! If you’re not happy with the offer, move on before you commit.

The interest rates can range from about 12% to 24%, depending on how much risk you’re willing to take. Hard money lenders expect a return on their investment, and this is usually between 10% and 20% of the total loan amount. With these figures in mind, don’t be afraid to shop around in search of the best possible deal.

Whilst hard money loans can be an expensive gamble, they can also be the perfect financial tool in some circumstances. If you need the money short-term and are fully able to repay with the required length of time, it may give you the financial leverage you need for your latest investment.

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