While buying property, many would resort to taking a loan. Since banks only provide loans to those who have a higher credit rating, what would others, with a poor credit rating, do?
The answer is simple. They can get hard money loans for their property. This loan is usually provided by a private lender, and it is not regulated by the Federal Reserve.
What is Hard Money Loan?
A hard money loan is a kind of loan that is taken to buy a residential or commercial real estate property. Hard money loans can cover between 10% and 60% of the total cost of the property. The rest will have to be provided by the borrower.
Since this is a private loan, its interest rate is also higher ranging from 15% to 20%. One can get a hard money loan in about two weeks. Moreover, in case of the borrower defaulting on the loan, the private lender can take over the property as collateral.
Why Do You Need Hard Money Loan? Should You Get it?
It is not preferred that you choose hard money loans. This is because it isn’t backed by the banks and doesn’t follow Federal Reserve rules and regulations. However, if your credit rating doesn’t allow the bank to lend to you, you can take a hard money loan.
Requirements for Hard Money Loan
Here are the requirements for getting a hard money loan for your residential or commercial property.
- Documents of Property
Make sure that the property you are buying is legit. This means it needs to be approved by the city and the state. You should check the No Objection Certificate (NOC) of the property that you are going to buy.
If it is a developed property like an apartment or a house, the developer will already have the NOC available. Now, assess the cost of the property. This will help you analyze how much loan you need to purchase the property.
- Authenticity of Property
Make necessary checks to make sure that the property is not disputed and is only possessed by a single owner. You must check the NOCs you need for the property and make sure that all the paperwork is complete before you decide to purchase.
- Property Insurance
It is recommended to get the property insured. This will save you from the wear & tear cost of the property for the next few years or for the period you use it. Insured property has a higher selling value.
- Bank Statements
Hard money lenders will be interested in discovering your financial situation before they can decide about lending money to you. So, you will need to get a recent bank statement that you can show to the lender.
- Legal Implications – Advice from a lawyer
It is important that once you have finalized a lender, discuss the potential borrowing options with your lawyer. In some cases, hard money lenders are loan sharks, and they are trying to capture you in their web. Your lawyer will be able to provide suggestions on how you can create a contract that favors you.
Things to Check While Getting Hard Money Loan
Here is a list of things you should check before finalizing a hard money loan.
- Check previous investments
Don’t be too hasty in borrowing loans for your residential or commercial property. First, you will have to do a background check of your hard money lender.
This means to make sure that they don’t become a threat to you later on. If they have invested previously, find out how they take back the money, what methods they employ, and is that even suitable for you? Many Dallas hard money lenders are authentic and provide you the right kind of financing with ease.
- Hidden charges, interest, and fees
Also, make sure that the moneylender doesn’t charge any extra money that is not mentioned in the contract. This can be interest, fees, or surcharges. In most cases, hard money lenders are likely to collect interest on the money they have lent to you.
You can ask the lender what type of additional charges they have on the mind. It will ensure that you don’t get any surprising charges while repaying the loaned amount.
- Evaluate the time frame of the loan
Before finalizing the loan, create a time frame of returning the loan. Make sure this time frame suits you. In most cases, the hard money lenders will ask you to return the loan within 12 months. This is because these are short-term loans. Therefore, the hard money lenders want to re-invest somewhere else after the amount is returned to them.
- Do cost/benefit analysis
Last but not least, make sure that you have done your cost/benefit analysis before you decide on a hard money loan. Because once you have agreed to the terms and conditions of the loan, there is no returning.
- Down payment & Equity
Hard money lenders would want you to pay the minimum amount of the property as a down payment as soon as you have received the loan. This will ensure that you have collected the loan for the property and not for anything else. When you have paid the down payment, you will get equity in the property.
However, you will not be able to sell it until and unless you have paid the property price in full. As said earlier, the loaned amount will only cover 60% of the total amount. So, you need to have cash in hand or amount in the bank that you can use to pay back the rest of the 40% of the property price.
Thus you don’t need to fret if you have a poor credit rating and you need a loan for investment properties. You can always check the requirements and get the right kind of financing in the form of a hard money loan. So are you ready? We wish you success and luck in all your funding ventures.
Andrea Bell is a blogger by choice. She loves to discover the world around her. She likes to share her discoveries, experiences and express herself through her blogs. You can find her on Twitter:@IM_AndreaBell