When most people hear the words “Hard Money Lenders”, they conjure images of hard faced, dark sunglasses-clad, leather-fitted types who conduct their business in dark alleys and charge exorbitant rates of interest.
In previous years, some disgruntled money lenders tarnished the hard money lending industry when a few greedy lenders attempted to dish out very risky loans to desperate borrowers using their homes as collateral and intending to foreclose on the properties. But the law quickly caught up on them and they don’t exist anymore. Although the stigma created when a few hapless borrowers lost their homes still remains.
What’s a hard money loan?
A hard money loan is simply a short-term loan given to a borrower and secured by the borrower’s real estate. The giver is usually a private investor, as opposed to banks or registered financial institutions. The repayment term is usually 12 months, but it can be stretched to 2 years or more depending on the loan size.
Hard money loans in California are popular when used to finance a transaction that’s expected to yield a quick return, or quick turnaround. Another plus is the little bureaucracy involved. You can apply for a hard loan in the morning and get an approval by the end of the day. And although many people borrow hard money with a closed eye-lid, because of the stigma and uncertainty, there is still etiquette involved and we attempt below to analyze the seven top tips for choosing the right hard money lender:
1. Check for a license
Dark alley or not, the best hard money financiers are licensed by their state’s department of Housing and Real Estate. Some are even affiliated with organizations such as Nationwide Mortgage Registry. Examine the license carefully and if in doubt ask the lender for a copy for further scrutiny. Check if any complaints have been raised against the license. If the lender resists your demand for a copy, then you should raise a red flag. Check out the lender’s name in reputable websites to ascertain about their professionalism.
2. Confine your search locally
It normal for hard money lenders to want to inspect the property that will mortgage the loan in person. So, your best option is to look for local hard money lenders. Some big hard money lenders have national branch networks, but they offer less flexibility than local lenders. And they may demand reimbursements for visiting expenses.
3. Do a comparison
Compare the terms and financial rates to other hard money lenders. Hard money lender usually average 10–15% interest and they don’t ask for administration or loan processing fees.
4. Insist on transparency
Everyone involved in the loan process needs to have access to all the loan data during the processing period and the lender should follow published loan guidelines. Watch out for hard money lenders who advertise fake rates that are not available in the real world.
5. Determine your needs
Don’t rush to take a hard money loan without conducting a thorough assessment of your needs. Some hard money lenders specialize in foreclosure rescues, commercial properties or investor financing. When applying for a loan against the property, make sure to give the correct address, determine the transaction closing dates, the purchase price of the property, determine the renovation cost as well as the post-renovation asking price.
6. Understand the ratios
Hard money lenders differ in their loan-to-value terms. Unlike banks, they use the value of the property “If it’s sold today” as security for the loan. They take a more conservative approach to valuation than banks. They prefer the asset value over the loan to value ratio, and many won’t lend above 70% of the property’s value, whereas banks may loan up to 80% of the home value.
7. Choose an interest rate
Choose a rate of interest you’ll be comfortable paying. Interests rates for hard money loans vary by lender and by the borrower’s unique circumstances. They begin at 10% but rarely go above 15%.