Basically, a hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by the value of the property.
The hard money lender looks first and foremost at the value of the property in question as opposed to the credit rating of the borrower, and grants a loan based on the equity of the property providing it is sufficiently valued over and above the amount of the loan.
Interest rates are usually higher than conventional commercial or residential property loans because of the higher risk taken by the lender. Most hard money loans are used for projects lasting from six months to a few years.
How To Get Approved For Hard Money Loan
There are a few steps one can take when considering a hard money loan in order to be prepared for approval:
Property Location: Hard money lenders need information regarding the location since the property will stand as collateral. Be sure the property is located in an average (or above average) area or neighborhood with comparable properties so the lender will feel their investment is protected. Show the lender photos and comp documents of other properties in the area, as well as recent sales of similar properties.
Project Cost Projections: If possible, get estimates from contractors that describe the repairs and other costs involved with the purchase so they can have an idea of current vs. future equity after improvements are made.
Verify Your Current Assets: Tell the lender how much cash you may have on hand, your income, your credit score, and how much experience you have in purchasing or investing in real estate. Although the lender may not require some of this information, this helps the lender understand your past and current financial situation when considering your loan.
Know Your Exit Strategy: Since hard money loans are usually short term (6 months – 2 years), tell the lender your plan for either selling or possibly refinancing the property before the loan term is over. This helps them understand your plans for repayment when making their decision.
How Best To Use Hard Money Loans
Real Estate Investors often purchase foreclosure properties or properties from sellers willing to accept low ball offers that are in need of repair and updating, then refurbish them and “flip,” or place back on the market, at a higher price. A hard money loan may be taken out to purchase new investment property or refinance an existing investment property previously acquired in order to free up funds to make new investment offers.
If you have questions or would like additional information about how a hard money loan could help you with your real estate investment needs, please feel free to leave a comment.