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8 questions to ask your hard money lender


paperfree Aditi Bansal

Updated on Thursday, May 11, 2017

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.

tags  #Hard money lenders for real estate  #Loan to Value Ratio #

 

Putting up a real estate investment comes with different challenges for investors with the lack of enough capital. The investors may have a problem acquiring a loan from the banks or other lenders due to a low credit history. In this case, the investors rely on the hard money lenders to provide funding for 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 pay at the end of the term.

How Hard Money Lending Works 

The hard money lenders are small local companies or private individuals who lend their loans depending on the value of the property while using real estate as the collateral. They fund loans much more quickly as compared to banks which can take a month or more. Most investors use the loans to transition a property from one state to another through the acquisition process, renovation, refinancing, and sale of the property. 

Choosing a Lenders

Investors should settle for lenders with a solid lending reputation and an excellent real estate lending experience. They may do this by making inquiries in the Real Estate Investors Association’s local chapter or at the BBB site. The lenders are either 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 the investors while the brokers provide the best service for investors who are still young in their career.

Inquiries to Make on Prospective Lenders

Hard money lenders have different lending rules hence the need to make inquiries on various things before settling for hard money loans for real estate. Below are some of the questions that the investors should ask the prospective lenders:

  1. Points and interests- interest vary from one lender to another depending on the risks involved. However, borrowers should expect a rate of 10-15% of hard money and points that begin from 2% to 4% of the loan amount.
  1. The loan terms- the terms may vary from short-term to long-term ones. The short-term ones run from 12-24 months while long terms ones go for 5years or more.
  1. 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. Additionally, some companies may base their loans on the ARV while others rely on the property’s value. Therefore, it is essential to ask on how the lenders determine their ARV and LTV.
  1. Upfront fees- enquire whether a lender requires the borrower to pay a loan application fee other than the customary appraisal and document fee. Remember to ask about any other hidden fees too.
  1. Down payment- most lenders require borrowers to contribute some amount while acquiring a loan. The borrower should enquire about the value that the lenders require as down payment.
  1. Penalty- ask about the penalty fees that one needs to pay if the loan goes past term
  1. Renovation work disbursements- the borrower should enquire whether the lender provides the renovation costs and how they release the funds.
  1. Time to closing- enquire about the period that the financial transactions take to close.


This page with a focus on Hard money lenders for real estate, Loan to Value Ratio was shared by Aditi Bansal.

 
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