If you are thinking about funding a fix and flip, new construction or rental property; there are a few things to consider before applying for a Hard Money Loan.
1. Be Liquid
As a Hard Money Lender we want to see that our borrowers have money in the bank. It’s important to save before you get into the real estate investment and fix and flip business; however, a good way to get started when you have minimal funds is to partner up with someone who does. The good things is most Hard Money lenders can fund a majority of the cost (sales price and rehab) not to exceed 70% of the final market value.
2. Expect Higher Interest Rates
Private Lenders will consider the risk of lending their funds on any particular deal if it has strong equity. Hard Money interest rates can range from 10-14% with origination points of 3-5%. Most loan terms range from 6-24 months in length. Usually these terms can be negotiable if the borrower has strong liquidity and a strong credit score.
3. Understand LTV Requirements
Let’s say you purchase a distressed home for $200,000 and it has a final market value (supported by an appraisal) of $350,000. Let’s also say this home needs $70,000 in renovation improvements. This puts your total cost at $270,000 (before closing costs and points). In this scenario the Hard Money Lender will lend up to $245,000 (or 70% of $350,000). The borrower will be required to bring $25,000 (plus closing costs) to the closing table in order to secure the Hard Money Loan.
4. Have a Solid Exit Strategy
Every Hard Money lender will ask you “What’s your Exit Strategy?”. Having one or more exit strategies in place will be important in earning credibility with a Hard Money Lender. An example can be to sell at full market value and/or to keep the property as a rental property and sell later. If you decide to keep the home as a rental property, the Hard Money Lender will want to see that you can qualify for a conventional loan in order to pay off their existing loan.
5. Don’t Settle for the First Hard Money Lender
The good news is rates and terms on Hard Money is getting more competitive these days. Private Lenders, Hard Money Lenders and Mortgage Funds are attracted to the higher returns offered by lending on real estate. If you have all your ducks in a row and you are experienced, you should be able to shop around and get competitive rates and terms.In addition, make sure to ask others for a referral. And always make sure to check out any Hard Money Lender on google for ratings.