America has a sizable number of property flips. There have been over 300,000 fix-and-flips in 2016, representing a $56 billion industry, that is why NYC hard money loans have been getting bigger at the same time.
Regardless of whether a buyer is searching for a fixer-upper or a newly constructed house, homeownership rates remain rising, at nearly 65 percent.
When it comes to buying a new home, many Americans depend on conventional bank loans. However, traditional bank loans are more difficult to obtain than hard loans.
The conditions for conventional bank loans are extensive, while the requirements for hard money loans are less onerous. With this, there is a lot of discussion as to why one would prefer to take out a hard money loan than a conventional loan and its corresponding requirements.
Continue reading to learn how to obtain a hard money loan, as well as the rates and conditions!
Pertinent Fact You Need To Know About Hard Money Loans
A hard money loan is just another type of secured loan, thus, this is backed by some real estate and is more commonly known as a short-term bridge loan. Individuals or private businesses, not banks, are the hard money lenders.
Although hard money loans were once considered a last resort, they have received increasing attention, and it is possible to discover a good deal if you look around.
For most cases, hard money loans are just simply backed by real properties, however, traditional banks make decisions based on factors such as:
- How good is the credit score of the potential borrower;
- What does the financial history of the borrower indicate;
- How good the borrower is in making payments
The process of obtaining a conventional bank loan could be lengthy and repetitive, as the lender conducts a background check on the applicant and its credit history.
Hard money loans place a higher premium on collateral. If a borrower defaults on a payment, the lender will seize the borrower’s real estate to satisfy the loan.
Usual Duration From Approval to Payment of Hard Money Loans
Hard money loans are often approved and financed in a matter of days. However, the usual period for hard money loans to be paid ranges from one to three years. Hard money loan rates are generally higher, which is why they make sense if you want to repay the loan quickly.
Numerous real estate flippers employ hard money loans since they intend to refurbish and sell the property within a year and use the property as collateral for the loan.
Is a Hard Money Loan Appropriate for Everybody
The primary reason borrowers want to seek out a hard money loan is for the loan’s potential to be repaid quickly. The majority of hard money loan cases are financed within a week while a conventional bank loan, on one hand, generally takes 30 to 45 days.
When a real estate investor is intending to purchase a property that has a high number of competitive offers, a fast close using a hard money loan is certain to catch the seller’s attention.
Many who have been denied traditional loans by several banks can also opt for a hard money loan. Foreclosures, short sales, debt issues, and income background all have a huge effect on an individual’s ability to obtain a conventional bank loan.
Even when a borrower is in a higher income class, if the work is new and there is no prior income background to support it, bank lenders can still reject the application.
Hard money lenders are typically willing to overlook any of these problems as long as the person has a sufficient amount of equity allocated in the land. Hard money loans have become an excellent option in the following situations:
- Quick funding for the purchase of lands
- Quick funding for real estate construction
- For fix and flips situations
- The buyer is facing debt problems
- When there is so much time for the investor to act on it
When conventional banks are unavailable and a borrower requires cash quickly, hard loans are the ideal solution.
How to Get a Hard Money Loan
The conditions for hard money loans differ by lender. Due to the fact that hard money loans are frequently made by private individuals or businesses, there is more space for negotiation. In all, there are three primary conditions for hard money loans.
1. You will be required to put up either an equity or down payment
The primary condition for obtaining a hard money loan is that you have the requisite down payment or equity in a specific property to serve as collateral.
The minimum sum is usually between 25% and 30% for residential buildings and 30% to 40% for commercial buildings. Occasionally, a lender may enable a borrower to obtain a loan with multiple assets. This is referred to as “cross-collateralizing.”
A borrower with a greater amount of capital or larger down payment has a greater chance of approval. The greater the borrower’s investment in the land, the lower the lender’s danger.
2. It is essential to provide records showing the borrower’s overall financial strength
Another often cited condition for hard money loans is that the borrower maintains sufficient cash reserves to cover payments for any holding costs and monthly loan. HOA dues, fees, and insurance are all examples of holding costs. The greater a borrower’s cash savings, the more probable they are to be accepted for a hard money loan.
Ordinarily, a borrower who lacks liquid assets would have trouble obtaining a loan. Occasionally, though, lenders will increase the loan amount and maintain a part of the debtor’s assets to meet loan fees, insurance, taxes, and other retention costs.
The borrower retains their loan in this situation, but the lender guarantees that monthly payments are not missed.
3. The hard money lenders should have adequate experience in real estate
The majority of hard money lenders are interested in learning about the borrower’s background in the real estate industry.
A borrower looking to fund their first fixer-upper may have a more difficult time obtaining a hard money loan than an experienced real estate investor.
If the applicant lacks expertise, the lender may request more information about the project, along with an exit plan for the current property. They’ll primarily be interested in seeing how the borrower intends to pay back the loan.
