Considering the fact that distressed properties don’t meet FHA Guidelines, it becomes difficult for fix-and-flip investors to acquire enough funds to buy the property or repair it. Banks and other credit providers refuse to offer loans for such investment opportunities. However, that’s where hard money lenders come to the rescue.
A hard money loan is basically a short-term loan offered to investors in the real-estate industry, who deal with distressed and foreclosed properties. Lenders usually provide the loan for a term period of 12 months. However, the term can vary from lender to lender.
If you are looking for hard money loans for your next project, take a look at the following facts associated with hard money loans.
1. Shorter Terms, Yet Higher Rates
Hard money loans have shorter terms and higher interest rates than traditional bank loans. Interest rates can be anywhere between 8-16%, while the principal amount can be up to $1 million.
These short-term loans are planned in a way that you have to pay monthly interest during the renovation of the place, and pay the principal amount after the property is sold. Though hard money lenders commonly use this plan, terms can differ according to the situation and amount.
2. Faster Access to Capital
Fix-and-flip investors benefit from hard money lenders because these short-term loans are processed quickly. Sometimes you can even get the funds in 24 hours, or within a few days. If we compare it with banks loans, they can take well over a month, not to mention the numerous meetings and discussions.
The primary reason hard money lenders don’t take as much time is because they are more interested in the value of the property, and not in the wealth of the borrower. If they see higher margins in a project, loans are passed instantly because they know their money is being invested in the right place.
3. Less Paperwork
Have you ever applied for a loan from the bank? If not, you can’t imagine how many documents you’ll need to gather for it. On the other hand, hard money lenders are more focused on your cost-and-benefit-analysis of the project. Yes, they wouldn’t mind knowing your credit score, but the after-repair-value (ARV) is what will increase your chances of getting an approval. The only documents hard money lenders require are: property documents, bank statements of you and your business, tax returns, and a statement of all the renovation costs.
4. You Can Expect a Loan of Approx. 65-70% of ARV
Don’t bank your hopes on getting the full amount. Usually, lenders only provide 65-70% of the ARV. That too will be determined after the lender takes a look at the property’s condition and your financial background. This tactic of not paying the full amount is a safety measure to avoid the risk of a loss.
If the borrower becomes a defaulter, and the property gets foreclosed, the value of the property will automatically fall. It will be sold for a lower price to repay the amount taken against it.
5. Lenders Expect Borrowers to Invest Their Money as Well
Another reason for holding back the 30% is because they want borrowers to put some of their money at stake as well. Most borrowers rely on getting the whole fund on credit. However, if you want to convince a lender to give you money for a certain project, show him that you are also putting up your money.
Wrap Up
Getting a hard money loan isn’t that difficult, all you need is an excellent property for investment, a convincing plan, and your personal financial documents sorted. Also, keep in mind all the points mentioned above to understand what you need to get your loan approval ASAP!