Are you considering getting a hard money loan, perhaps for something like real estate? Wondering how to get a hard money loan in 2020? We explain.
If you need money to accomplish a goal or finish a project, a hard money loan could be a perfect solution to help you get the cash you need.
Before you determine if this type of financing is right for you, it’s crucial to know how to get a hard money loan in 2020.
Read on to learn more about these types of loans, how you can get approved, and what you can use them for whether it’s real estate, new construction, or to reach your business goals.
Hard Money Loans Defined
Before you dive into how to get a hard money loan, you should know what this financial term means. The words “hard money” refer to a set amount of money loaned to a borrower (you) from a lender. The terms can vary based on your specific situation, the lender, and any details set forth in the loan contract.
When you get approved for a hard money loan you will receive the money in one lump sum. The lender will get monthly interest on your loan until it’s completely repaid in full. You may also be charged a one-time, upfront fee that helps the lender process your loan.
With hard money loans, your financing is backed by a physical asset, typically the land or property you are purchasing. Standard loans are based on your credit score and may or may not include collateral as a condition for the loan.
You can find hard money loans offered by private investors, investor groups, and even some big banks. Do your research to find out what the terms of the loan are before you accept an offer. This is the best way to ensure that you’re getting a good deal and more “bang for your buck” when it comes to repayment.
The Purpose of Hard Money Loans
Most real estate investors or new home buyers who need to build a home will use a hard money loan. Most traditional banks don’t offer these loans since the investment can be considered risky.
If you’re a real estate investor and need financing to purchase or build property, a hard money loan can make it easier for you to pay your contractors and get the job done. It’s also an excellent solution for those who enjoy buying and flipping property to make a profit.
People who purchase properties to rent out for an income may also use a hard money loan until the property is stable. Then, they may convert the hard money loan over to a traditional mortgage at a lower rate as they pay off the hard money loan.
Some applicants with poor credit may also explore the option of a hard money loan. It’s difficult to get approved from a bank with poor credit, but those with enough equity in their property may still qualify for a hard money loan. This is a good option for those who may be facing foreclosure and need cash fast.
Lenders of hard money loans use assets as a backing for the loan rather than credit. This means if you have a reasonable amount of assets, you could get approved for this type of loan over a traditional mortgage.
How to Get a Hard Money Loan
A hard money loan is not based on a borrower’s credit, but instead, it is based on the collateral you’re able to offer. In fact, for many, the credit score is not even taken into consideration when you look at how to get a hard money loan. The collateral offered to the lender is what matters most.
In most cases, a loan to value ratio is calculated to determine your amount and approval for the hard money loan. This ratio uses a percentage of the property value to make sure it’s enough to secure the loan. If it’s not enough, you might have to include personal assets in order to get approved.
The lender will appraise the current value of the property with respect to the requested loan amount. The higher the loan to value ratio, the more difficult it might be to secure a hard money loan. For most lenders, around 70 percent of the property value will be loaned to the borrower.
This ratio is a measure of risk that all lenders use to calculate how much they will offer the borrower, and if they will approve the borrower for the loan. Make sure your current property has a decent appraised value, or that you have some other forms of collateral you can offer just in case.
If you’re still not sure if a hard money loan is right for you, there are several crucial facts to keep in mind. These types of loans are considered short-term loans with a repayment length of at or under five years total.
Another essential thing to be aware of is that hard money loans have a much higher interest rate than most traditional loans. The cost to repay your loan could add up quickly as time goes on, so use them with discretion.
On the other hand, if you cannot obtain financing through other means, a hard money loan can be an excellent alternative. They’re also very common with real estate investors and those who are looking to work on an investment property project. Most traditional lenders shy away from these types of loans, while a hard money lender does not.
If you need financing for a construction project, hard money loans are an excellent way to go. These loans are not backed by federal agencies, but instead, they’re secured by third parties such as private investors and private lending firms.
What are the Benefits of Hard Money Loans?
If you’re thinking about getting a hard money loan in 2020, there are plenty of perks to choosing this option. Perhaps the biggest benefit is that the application and approval process is typically much faster than a traditional loan or mortgage. Your credit score won’t have any effect on your approval odds, either.
For those who have adequate collateral to back the loan, a hard money loan may be best. You can take the loan out against a property, and you may even get approved if you have a foreclosure in your history. Make sure you talk to several lenders to find out what terms apply to the loan you need.
Another perk to these types of loans is their sheer flexibility. Big banks are usually not as flexible when it comes to how or where you can spend your money. However, a hard money loan gives you the freedom to do what you want and need with the money you receive.
You’ll also get funded fast with a hard money loan. In fact, these loans are signed and delivered more quickly than practically any other traditional loan. Since there is collateral involved to back the loan, it can be closed much faster than a mortgage or personal loan from a bank.
How to Get Approved with the Best Terms
When you apply for a hard money loan, you will definitely need some sort of collateral along with a solid business plan. This information will give the lender confidence and make it clear what you intend to do with the money you receive.
Most lenders require around 40 percent of the funding to come from you, the borrower. You will likely not receive a 100 percent value when you apply. It is important to note that the amount of money you get approved for can vary between different lenders, so make sure you shop around.
Be ready to discuss your current financial information and provide the necessary documents to your lender. These documents can include things like recent bank statements, W2 forms, and pay stubs or tax returns. This is common practice for most loans, including hard money loans.
If you have a solid standing financially, you will likely have better rates and terms. Once you’re approved for the loan, it’s advised that you start work on your project right away. Keep in mind that these are short-term loans, so the faster your project is completed, the less you’ll pay in fees and interest charges.
Keep in good communication with your hard money lender and let them know where you are with your project. If they request any information from you, make sure you provide it to them as soon as possible. The sooner you can get your project completed, the sooner your hard money loan will be paid off in full.
Follow Your Dreams with a Hard Money Loan
Once you understand how to get a hard money loan, it’s easy to find the funding you need to complete your project. Whether you’re a real estate investor or a consumer looking to build a home, these types of loans can give you the cash you need to make it happen.
Before you apply for the loan, make sure you have enough collateral and assets to be approved.
For more information about hard money loans, visit our website and check out our FAQ section today!