In the real estate industry loans are a key part of the overall industry. While banks are the most common source of real estate loans they are not the only source of capital when you’re looking to purchase a property. Hard money lenders provide useful services and depending on the nature of your real estate situation may be a more practical choice than a bank. Here are common questions related to this type of money lending and situations where you may want to consider it.
General Questions and Answers About Hard Money Lenders
- Defining Hard Money Lenders: a hard money lender is a lender who provides loans commonly used in real estate transactions and business ventures. These types of loans differ from bank loans in that the loans tend to have higher interest rates, use the property as collateral, and hard money lenders may offer loans for situations where a bank may refuse due to having different standards in determining loan approval.
- Why Does This Service Exist?: hard money lenders exist because, in the real estate industry, time can often be quite limited, and the faster you can receive funds for a purchase or real estate deal the better. Hard money lenders are faster than traditional banks and also offer more transparency on their overall lending procedures.
- Why You Would Want To Use a Hard Money Lender: even in situations where you would qualify for a bank loan, a hard money lender may make more sense given your circumstances. These circumstances can include a short time windowthat a bank can’t meet (hard money lenders can complete a loan within two to four weeks on average), you want to use a single investor and not require multiple investment sources, you don’t want to deal with a more complex bank loan, or your existing line of credit simply cannot meet your finical needs.
- Who Funds These Types Of Loans?:hard money loans are typically funded by one of two sources. Source one is an individual who works in or is highly familiar with the real estate industry and works in this part of it. Source two is funds that collect investment capital from multiple people and are professionally managed. Investors who invest in these multi-person funds tend to be less experienced in real estate.
- Advantages of Hard Money Lenders: there are several advantages to using hard money lenders. They save you time not just in receiving money, but also in the loan process, as the application process is less complex, and you receive approval (or denial) far more quickly than with a bank. While your finances are considered they are not as focused on or as important when compared to a bank loan. Hard money lenders tend to focus on the practicality of the deal itself, so personal factors such as your credit historyand if you are self-employed do not factor in your approval as much as they would with a bank. Finally, the speed and ease of a hard money loan allow you to focus on your real estate business deal and achieve positive results.
- What Types Of Properties Can Be Used For These Loans: hard money loans are used for an assortment of different properties including residential properties, industrial centers, shopping centers, office buildings, and land for development. Note that most lenders will not lend money for occupied residential properties, including vacation homes.
- What Are Common Loan Terms?: The length of the loan can vary based on the property type and the associated development and renovation time required. Hard money loans can run from six months up to three years. For example, a residential property loan may have terms of six months to a year. However, a more complex job such as a shopping center may have terms of two to three years.
Finding A Reputable Hard Money Lender
As with any other financial service you will want to do proper research to ensure the lender you choose to work with are skilled and well regarded in the industry. This not only means your loan will go through properly it also helps in that you don’t waste your time or encounter professional disappointment. Three signs of a good lender include:
- References Are Available: a good lender will have references and will be more than willing to provide them when you ask. Contact these references and ask for their opinion and a brief overview of the loan process. Knowing what to expect will help you in deciding if a lender is right for you.
- The Proper Licenses: like other aspects of the real estate industry a hard money lender has to be properly licensed. Your lender should have a current and active Real Estate Broker License in addition to any other licenses your state may require. Once you collect their license information, you can check public records to see if they have any complaints of note. Also, consider checking BBB records to see if any complaints exist and if they have any merit to your situation.
- Reputation: finally, consider a lender’s reputation both among their customer base and in the real estate industry. Online reviews, industry events, and referrals can tell you a good deal about a hard money lender and how they are viewed by both customers and peers. Hard money lenders often belong to professional organizations such as the National Hard Money Association and the American Association of Private Lenders, just to name two.
As the above questions and answers show, hard money lenders occupy a valuable part of the real estate market. While you most likely will pay higher interest rates than with a bank loan, the advantages are often well worth it. The ability to gain capital quickly and with less paperwork can be key in making a good deal given how fast the real estate market can move. In addition, banks can be risk-averse and may not approve you for a loan for a property that does not meet their criteria. With a hard money loan, you can focus on your goals in the real estate market without having to delay or worry about an overly involved loan process.