Hard money loans are short-term loans taken by real estate investors to buy residential or commercial properties. Private money lenders give out these loans at slightly higher rates than traditional banks. Hard money loans come with shorter repayment periods, usually 12 to 18 months, with rates falling between 7% and 12%. The loan’s processing period is one to two weeks, making it an attractive option for many investors.
Private money Lenders expect borrowers to make monthly payments (interest only) with the remaining amounts payable at the end of the loan term. This payment arrangement makes it ideal for investors looking to flip the property then use the lump sum to repay the debt.
Since the property to be bought is used as collateral, both the lender and the borrower minimize their risks. However, the risk isn’t fully eliminated, and defaulting on the loan allows the lender to sell the property and cover the outstanding loan.
Hard Money Loans Requirements
To qualify for hard money loans, you will need to meet a set of requirements. Most lenders define their requirements based on the risks they can comfortably incur and the profits they project as a result. For instance, lowering the down payment may increase the chances of losing more money in case of a default. However, it may also attract more experienced investors, bringing in more business for the lender.
These are the three most common hard money loan requirements.
- Having the Required Down payment. Most lenders require borrowers to contribute 50% to 25% of the property’s value towards the deal. This means the best lender will only fund 75% of the total cost of the property. If you cannot raise the down payment within a given timespan, the lender may choose to cancel your deal.
- Real Estate Experience. The housing market can be quite volatile, and it’s not uncommon to hold on to a property for years with no sign of a serious buyer. Veteran investors are always aware of the possible challenges, and they can use their experience to navigate bear markets. This gives veteran investors a competitive advantage over new ones.
- Overall Financial Strength. Lenders will often evaluate the risk of default by gauging your overall financial strength. If you are a seasoned investor with several properties and multiple income sources, you increase the chances of qualifying for the loan.
- Enough Cash Reserves. When buying a property, there are fees and expenses you’ll need to make besides the principal amount. These expenses include closing fees, homeowners association fees, utilities, etc. If you hold on to the house for long, you’ll also need to pay taxes and other property maintenance fees. To qualify for the hard money loan, you need to prove that you can cover all these expenses before selling the property.
How to Choose the Best Hard Money Lender in Florida
If you are looking for the best private money lender in Florida, there are several options for you to choose from. And to avoid picking the wrong company, you will need to observe the following:
- Do your research. The first step is to ensure you actually need a hard money loan and that you can qualify for one. You then want to look around for reputed lenders with a proven track record in the industry. Consider ranking the top five or ten lenders in your area then researching each one of them. You can start with their website social media sites, then check customer reviews on some reputed third-party sites.
- Ask around. Besides relying on your own research, you can choose to ask for recommendations from seasoned investors within your locality. You can compare this new list with what you already have to check for matches.
- Ask the Right Questions. Once you have the best two or three lenders that have passed your vetting process, you want to email or call them to learn more about their services. Be sure to ask the right questions, for instance, the rates, loan repayment terms and whether it can be extended, any underlying fees, what to expect, etc. Based on their response, you can comfortably choose one lender to work with.
Is Hard Money Loan Right for You?
Hard money loans will only make sense if you are an investor with some experience in the real estate market. The loan can also be a great alternative if you have a bad credit score and cannot qualify for a traditional bank loan. That said, you want to assess your current financial situation before getting all in.
For instance, you may want to forgo your deal until you have enough money to raise the down payment instead of using all your savings then risk defaulting on the loan. That said, a hard money loan isn’t for you if you plan to use it for reasons other than investing.
Get Started With Hard Money Loans Today
Hard money loans can be a great opportunity for seasoned investors and house-flippers looking to make quick profits in the real estate market. Finding the right hard money lender is only half the battle. You need to meet the loan requirements and have a realistic loan-repayment strategy, just in case you fail to sell the property within a given time frame.