5 Tips To Be Smart With Hard Money
For those who want to close a deal quickly or who need cash but have a poor credit rating or don’t have any proof of income, using hard money is one available option. Borrowers can fund their next real estate investment using hard money.
You’ve probably heard about hard money and foresee it as a viable solution to your money problem. However, before you make a final decision, it’s important to know what hard money loan is all about, as well as learning some tips to be smart with it.
What Are Hard Money Loans?
Hard money loans refer to a type of loan secured by real estate property, which means that you need a real estate collateral. While soft money loans have a below-market interest rate with longer repayment periods (such as a car loan), hard money loans have higher interest rates and are harder to pay back. That is why hard money loans are considered short-term bridge or “last resort loans.”
Hard money lenders are not banks, but individuals or companies who are less concerned with the credit rating of the borrower. These lenders are primarily concerned with the equity amount that the borrower has invested in a real estate property, which will be used as loan collateral.
That said, here are some tips that can help you be smart about hard money loans:
- Know The Risks
Hard money or private lenders are very much willing to lend you the sum of money you need in exchange for a real estate collateral. However, you have to know the risks for getting this type of loan. Take a look at the following risks involved in hard money loans:
- Scams: Protect yourself from scams by knowing how scammers operate. They’re usually seen in social media platforms, claiming to help people who can’t avail of traditional loans to get fast and easy loans. But beware of loan terms that are too good to be true and lenders offering hard money loans in social media.
- Can’t Afford To Repay The Loan: Because hard money lenders disregard credit ratings and don’t require any proof of income, borrowers might end up not being able to repay this type of loan. So, it’s crucial to determine your ability to pay back the amount you’re planning to get, and check any hidden costs.
- Unclear Terms: Make sure to read the terms of the hard money loan before availing it. Private lenders are more flexible, but tend to write whatever terms they want and many willing borrowers fall for this trap.
- Review The Lender’s Reputation
Not all private money lenders are the same. There are many honest and reputable hard money lenders you can go to for a quick deal loan. Check reviews online or interview the previous borrowers of the lender to find out their personal experience in dealing with them.
- Avail Short-Term Than Long-Term Hard Money
Hard money loans are better as short-term loans, that usually last from one to five years. It’s not advisable to keep it longer than that because of higher interest rates than traditional loans. In this way, you can avoid snowballing debt.
- Check The Loan-To-Value Ratio The Lender Offers
Many hard money lenders maintain low loan-to-value (LTV) ratios in order to sell a property quickly if the borrower fails to pay. The maximum LTV ratio is between 50% to 70%. That’s why borrowers need assets in order to qualify for hard money. If your property is far more than the lender’s LTV ratio, then you might as well find another loan option or another private money lender.
- Use Your Hard Money Wisely
Because hard money loans have higher interest rates than traditional financing, it’s important to invest the borrowed money wisely. Take a look at the following tips on how to invest your hard money wisely:
- Think Of The Purpose Of The Hard Money: Fix-and-flip investors usually avail of hard money to increase the value of their property, enough to make profits and pay their loan within a year or so.
- Compute Return On Investment: Find out how much money you will earn from your investment. Hard money loans can be used to immediately start a new promising business that would require a large amount of capital, but you can’t afford to get any type of traditional loan because of your credit rating.
Hard money loan is one way you can borrow money without working with traditional mortgage lenders. This type of loan comes from individual investors or investing companies lending money based on the property used as collateral. It’s important to know the risks and benefits of using this type of loan, such as dealing with predatory lenders.
Also, it would help to review the reputation of the lender to avoid overwhelming debt. Check the if the lender’s offer is viable and fair by knowing its loan-to-value ratio. Finally, make sure to use the hard money wisely, so you can repay the loan as agreed upon.