Hard money loans are generally used to finance real estate investment opportunities or other collateral backed loans. Since they are funded by private investors and not to banks, a hard money loan might be an appropriate option if you do not have a high enough credit score to secure a traditional mortgage from a bank or do not intend to hold on to the property for a long period of time.
In addition, these types of loans are also used as bridge money between construction financing and long-term loans, as hard money loans are often used for construction because long-term lenders may want finished and leased projects and the builder will not have the land or the home long enough for a traditional mortgage for it to be worthwhile for either party.
It is best to do your research before you apply for a loan from anyone, including a bank or other traditional institution. The same is true for hard money lending. However, the process is a bit different. To begin with, go online and find those companies that have websites you can peruse in order to find out the types of projects that they finance and their standings with their investors. In addition, you want to be able to work with an actual person and not just online. This will enable you to ensure you are dealing with the actual company and not a data collection agency that will just send you on for the next step.
Since these types of loans are not based on credit score, when you apply you need to be prepared to prove the value of the property as well as how you plan on improving it. In addition, you will also probably need to come up with 30-40 percent of the value on your own, especially if it is an individual property. You will also need to pay the closing costs, as well.
Additionally, before you sign any paperwork, be sure to review the terms of the loan with your lawyer as private investors are subjected to very few regulations. Therefore, you should make sure your legal interests are protected. You also need to ask about the loan’s impact on your personal liability. It may or may not be affected.
Be sure to remain in constant contact with your lender and move quickly on your investment as the term of your loan may only be one year. Remember, if you do not pay back the loan in time, then the lender may be able to take your home as collateral. In order to avoid this, make sure you can afford the repayment schedule stipulated in your loan agreement. This is important because many hard money loans stipulate that you will repay the loan in one large payment after the house sells, especially if you took out the loan in order to flip the property. This one payment will cover the principle on the loan, as well as the accrued interest.