When money and financing are discussed between investors there are two types of money lending discussed namely, hard and soft. If you are a first-time investor you may be curious about hard money lending.
There may be several questions in your mind such as:
- What is hard money lending
- Who are the hard money lenders
- How can you get it and
- Whether or not it is beneficial?
Well, for this you will need to start from the basic principles of hard money lending.
The strict rules
First of all, you must know what the term “hard money” means. Typically, hard money is not as easy to get as soft money because it has much stricter rules to qualify in comparison to the soft money lending rules that are more flexible.
Hard money lending is much more restrictive not because it is more difficult to obtain but for the fact that the terms in it are much more strict and very specific. This is required because most hard money comes from the private individuals who have a lot of money with them to offer. It is for this reason hard money lending is also referred to as “private money lending”.
This money does not come from any institution such as a traditional bank or from any other non-bank financers such as https://www.libertylending.com/ but from people like you and the money can be used for investment purposes specifically. It is for this reason, protecting the investment capital is the first priority of the hard money lenders. This is why the terms for hard money lending are so strict.
The varying terms
The terms that will be associated with hard money lending will vary from one hard money lender to another.
- In most of the cases hard money is lent only on the basis of a deal or any property at hand.
- Money is lent only up to a specific percentage of the fair market value of the property in hand.
- In the event of any default, the hard money lender will foreclose or sell the property to any end buyer thereby making a handsome profit.
- There are several hard money lenders who in order to stay in the business will require more than just the equity of your home to qualify.
However, with the rise in the number of hard money lenders and the growing concerns over the strict control and eligibility requirements of the hard money lenders, new laws are now made that are favorable for the consumers.
These laws such as the consumer protection law however seems to have compelled some hard money lenders to be even harsher with their requirements while applying for a loan. This is because they want to avoid the hassles of the expensive and time consuming court procedures.
The terms to know
Therefore, if you are looking for such a loan, make sure that you research well to know the terms associated with the loan while dealing with a hard money lender. This will help you to find a lender who will be able to satisfy your needs. Here are a few of the common terms that you can expect to come across.
- Typically, a hard money lender will only loan you up to 70% ARV or the After Repair Value. This means the value of the loan in repaired condition. Therefore, if your home is worth $45,000 in the given condition and needs another $20,000 for the necessary repair works so that it can be sold at a fair market value of say around $100,000 in the prevailing market, then you will typically get a loan up to $70,000. This money will cover the cost of the house as well as the repairs.
- Another common term you will come across is the interest rate which is very high in hard money lending market. Interest rates of hard money loans may vary from 12% to 20% annually. Apart from that, the terms may also vary and may last for 6 months to a couple of years. In most of the times, the rate of interest charged on a hard money loan is on the basis or the credit score of the borrower as well as the experience.
- You will also come across terms such as closing costs or fees when you use hard money. As for the closing costs, a hard money lender will typically charge anywhere from 2 to 10 points to provide their money to you. One point equals to one percent of the total mortgage amount. That means, a hard money lender charging 1 point on a loan of $100,000 will come to $1000.
All these terms are very useful to know and pints to consider when you choose a hard money lender.
Other things to consider
There are also a few other things to consider while taking out a hard money loan.
- One of such things is the time. You must know how quickly the funds will be available because in most of the times when it comes to investment properties, you will need to move very quickly so that no opportunities are lost.
- To make all the difference it is important that you begin a relationship with the potential hard money lender as quickly and strongly as possible.
- You will also need to be aware and consider the pre-payment penalties as these penalties can really affect your deal. It may substantially cut into your profits if you do not avoid pre-payment penalties.
Also consider the application process as many hard money lenders may also require you to fill out a credit application. In this application you may need to provide several documents such as:
- The bank statements
- The W-2s
- The tax returns and
- Your latest pay stubs.
Once again this is done to protect their assets. There may be a few hard money lenders who follow the old fashion way and only care about the deal. They will be happy and satisfied with the physical verification of the property instead of requiring a long list of documents. Again it all depends on the lender you deal with.