8 questions to ask hard money lenders
The lender should consider asking for references from the prospective hard money lenders. Most of them may not honor the request due to the client confidentiality agreement, but others may agree to give a reference.last updated Thursday, October 5, 2023
#hard money lenders #questions to ask hard money lenders
| John Burson | Subscribe |
CONTENTS
Putting up a real estate investment comes with challenges for investors with insufficient capital. Due to low credit history, investors may have difficulty acquiring loans from banks or other lenders. In this case, the investors rely on the hard money lenders to fund their investments. Their terms range from one to five years, with the repayment method varying between monthly payments with interest to a set principal amount or interest only with a balloon payment at the end of the term.
How Hard Money Lending Works
Hard money lenders are small local companies or private individuals who lend their loans depending on the property's value while using real estate as collateral. They fund loans much more quickly than banks, which can take a month or more. Most investors use the loans to transition property from one state to another through the acquisition process, renovation, refinancing, and property sale.
Choosing a Lenders
Investors should settle for lenders with a solid reputation and excellent real estate lending experience. They may do this by inquiring in the Real Estate Investors Association's local chapter or at the BBB site. The lenders are direct lenders who provide funding directly from their capital or the brokers who serve as the intermediaries between investors and borrowers. Direct lenders offer better rates and flexibility to investors, while brokers provide the best service for investors who are still young in their careers.
Inquiries to Make on Prospective Lenders
Hard money lenders have different lending rules, hence the need to inquire about various things before settling for hard money loans for real estate. Below are some of the questions to ask hard money lenders:
- Points and interests- interest varies from one lender to another depending on the risks involved. However, borrowers should expect a rate of 10-15% of hard money and point from 2% to 4% of the loan amount.
- The loan terms- the terms may vary from short-term to long-term ones. The short-term ones run for 12-24 months, while long-term ones go for five years or more.
- The loan-to-value ratio (ARV) and the after-repair value (AVR) - Most lenders provide LTV of up to 75% on the income-producing properties and 50% on the land. Some companies may base their loans on the ARV, while others rely on the property's value. Therefore, asking how the lenders determine their ARV and LTV is essential.
- Upfront fees- enquire whether a lender requires the borrower to pay a loan application fee other than the regular appraisal and document fee. Remember to ask about any additional hidden fees, too.
- Down payment- most lenders require borrowers to contribute some amount while acquiring a loan. The borrower should enquire about the value the lenders require as a down payment.
- Penalty- ask about the penalty fees that one needs to pay if the loan goes past the term
- Renovation work disbursements- the borrower should enquire whether the lender provides the renovation costs and how they release the funds.
- Time to closing- enquire about the period the financial transactions take to close.
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