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What is hard money?
Hard money loans are made when you have nowhere left to go. Their credit scores are abysmally low: below 620; consider the range 300-400. It has a history of defaults, late prepayments, late payments, bankruptcy (among its multitude of misdemeanors). No lender would accept it. Those are the worst scenarios. But you want that house.
Hard money lenders may consider it.
Why?
Because they look at the value of your property rather than your history or credit rating. Certainly some may count on some of that, but at the end of the day, the calculation is based on the value of your collateral – how promising it is and whether it will repay the lender’s funds.
Hard money loans range from $ 20,000 to $ 150,000, or more, depending on the lender’s funds. Most loans are also limited to 3-5 years, although you can find some that offer options for longer terms or for later payments. The loans also differ. You will find a variety from commercial to rehabilitation, through the so-called social loans and personal businesses. These are the most common.
Hard money loans are also called ‘bridging’, ‘direct rehab’ or ‘personal’ loans, as the hard money lender provides you with money that meets your needs, whether to repair or buy a home (or related emergencies). ) and he or she loans out of pocket. The advantages of the hard money scenario are that the process is flexible, fluid and fast. Lenders set their own terms and hours that generally fit your needs. Little paperwork is completed and it all happens in as little as 7-10 days. The disadvantages consist mainly of the high interest rate and the low loan-to-value ratio. Hard money lenders must be certified by organizations such as the American Association of Private Lenders (AAPL), through their state regulatory agency, and through the National Mortgage Licensing System (NMLS).
Definitions you may need to know
Bridging loan: this is a short-term loan to “bridge” the interval between the purchase of one property and the sale of another. A typical bridge loan is for a short-term loan of 6 months or less, although the terms vary.
Rehabilitation loan: this is a short-term loan that is granted to improve a property to refinance it or sell it. The borrower shows the lender construction milestones and results as construction progresses; funds (held in escrow) are released accordingly.
Residential loan – This type of loan is to buy private property, usually one you want to live in. Consumer protection agencies and federal governments have issued a host of regulations that protect you. There are more dating as I write this.
Business Loan – To buy a property that you want to repair and flip for business purposes. These generally carry a higher risk as they are more expensive to buy and involve years of long and expensive work. Banks are more reluctant to support them; Hard money lenders are generally more agreeable as they tend to promise more returns.
How Hard Money Offers Work
You’ll want to come up with a business plan that specifies your experience, the promise of the property, and why you think it’s a promising investment. The lender will examine the deal, analyze the properties, and rate it. If she approves, she will charge you fees plus interest. You will be enrolled in a balloon payment program, which means that you will pay slightly higher amounts of payment with a significantly large payment once your loan reaches maturity. Failure to make this repayment means that the lender pockets your collateral. You can also choose whether to pay back the regular monthly payments or pay a lump sum of interest at the end.
The pros and cons of investing in hard money
- Your rate of return is invincible to fluctuations in the stock market, global politics, or even long-term real estate trends.
- There is no need to buy or manage the real estate in which you have invested your funds.
- You can get proven and predictable rates without compromising your money for years. (Private investors are generally offered a fixed rate between 6 and 14% annualized with no commission, although terms vary by lender and individual agreements.)
- You have absolute control over your loans. You choose your borrower and investor. You decide whether or not you want to lend to certain clients. It also selects its funding partners.
There are also downsides to becoming a bridge loan or hard money investor:
- Research is required: You will need to have an excellent understanding of real estate laws and property values to be successful in this highly risky field. It will be much more worthwhile to obtain the services of a reputable and proven company that finds, analyzes and organizes the offers.
- Time frame: You will need to reapply for one bridge loan after another (as each has short-term applicability). Ideally, you will be working with a company that you can do a lot of transactions with over time.
- Risk: All investments are risky, but this one is particularly risky, especially if “Murphy” appears: your income plummets, the market changes, your partner divorces, your child dies, who knows what destiny he has in mind for you. Result: you lose funds and assets.
The conclusion is as follows:
Every effort is made to protect the investor’s original investment and, if possible, also the interest owed. However, it may take longer than anticipated and the only real guarantee you have is the value of the home. While that may seem somewhat unsafe, consider these facts to put risk in perspective.
In shorts …
Bridging loans and other hard money loans can be safe and reliable investments when properly scrutinized and executed. Banks have been running these types of loans for years until it is less safe for them to do so. Then the individuals took over. If you want to become a hard money investor, you may consider hiring a private lender who will carefully assess your ability to pay and the value of your property. The key is also that you find a reputable and transparent lender who is open to their terms and sets compelling rates. Also make sure you can refund it.