A huge proportion of real estate investors across the globe highly depend on hard money lenders for financing support to grab hot property deals or make a real estate investment. The loan borrower uses a property as collateral for the loan until the loan is repaid. The real estate property is held by the private hard money lenders for a certain period of time to make sure the borrower pays the loan on time. In case of any default, the hard money lender sells the property and uses the money for your loan payment. In this article, we are going to look at the questions to ask hard money lenders.
Different lenders have different terms and criteria that they use to run their operations. Loan repayments can be done in monthly payments of both principal and interest or only interest and an end-month balloon payment. Before approaching a certain hard money lender, the borrower has to prep and do research about the local lenders to know about their reputations and whether they have favorable lending offers at hand.
Since the property is used as security for the loan, the hard money lenders focus more on the real estate property value rather than the borrower’s credit history. All their attention usually lies in the property’s value and potential to make a profit in the future. Traditional lenders such as banks and other financial institutions are really strict about an individual’s credit score with other lenders in the past.
This is the main cause of loan application rejections by conventional financing companies. As a result, the individuals may decide to approach hard money lenders for a fund boost. Hard money lenders are known to specialize in different types of loans. Namely; refinance loans, cash-out loans, and purchase loans. Purchase loans are used to finance Real Estate property acquisition. Refinance loans are used by investors to repay outstanding debt. Cash-out loans are used to fund an existing property as well as paying outstanding debt.
Hard money lenders grant the money to borrowers within a short period of time i.e. one to two weeks. Many investors prefer borrowing from hard money lenders to traditional banks because hard money lenders are highly responsible and time-saving. However, the interests charged by hard money lenders are relatively higher due to the higher risks the lender is likely to come across during the lending course.
These interest rates vary from one location to another. Many homeowners prefer borrowing from local lenders since money lending is based on relationships. The basic thing that a borrower should consider before seeking funds from lenders is an intact reputation and a good experience in real estate hard money lending. Hard money lenders are categorized into two bits i.e. direct lenders as well as brokers.
Direct lenders finance investors using their self-provided capital while brokers play a useful role in helping upcoming investor to grow their portfolios while direct lenders offer the best financial support with fairer interest rates and unmatched flexibility since no intermediaries are involved in the whole course.
Questions to Ask Hard Money Lenders
How much hard money lending experience do you have?
The investor should make sure their lender has competent experience in hard money lending and sufficient experience lending the type of loan the borrower is looking for. You are recommended to go for a more experienced hard money lender due to better offers and an assurance of good loan terms and conditions.
Are you doing direct money lending or brokering for a company?
Direct hard money lenders fund investors within a very short time while a hard money loan broker gets to make requests to another financing source. Loans from direct lenders are granted faster and more swiftly but sometimes acquiring a loan from a broker’s connection lowers the borrower’s loan costs.
Using a broker lender can be of advantage to the borrower since the brokers might know different lenders with different offers including those offering a specific type of loan due to the long-time interaction with the lenders.
Do you have kept records or reviews from earlier lending?
An experienced and reliable money lender should at least show a borrower a number of satisfied customers i.e. their reviews and testimonials. Sometimes the lender might have the reviews on a third-party website. The presence of testimonials and reviews is a good sign since it means that the Lender is experienced in the field and is probably going to eventually help.
What are your loan interest rates and charges?
The extra points as well as interest rates are two key factors that determine the overall amount of cash paid by the borrower during loan repayment.
After contacting a few hard money lenders, the borrower would have understood the interest rates for their loan application. Since the loan cost is the chief factor that a borrower considers before selecting a lender; reliability and experience levels should be considered.
What is your valid license ID?
Before acquiring any financial assistance from your hard money lender, make sure they are licensed and they can present it. Their license ID should be depicted on their respective websites or any advertising material they use to market their services.
Feel free to ask them for their license ID. The license ID can be used to redirect to the lender on a website. Searching this ID on the state website will show you more information about the license owner.
What LTV do you offer?
The LTV (Loan to value) ratio is the amount of cash the hard money lender is going to grant you depending on the value of your real estate property. The loan to value ratio varies from one hard money lender to another. It also varies from property to property.
The loan to value ratio of residential property is usually higher than the LTV for commercial property. Land and rural areas are known to have low loan to value ratios due to the high risk involved when investing in them.
Is there any prepayment fee?
It’s common for hard money lenders who demand a small prepayment penalty to be paid before disbursement for minimum loan interest rates during repayment. In many cases, the borrowers are not bothered by these prepayment penalties since the interest rates are made fairer.
If an investor pays the prepayment penalty, they should be determined to keep track and make sure it all works for the proposed period. However, the borrower can negotiate with the hard money lender to get rid of the prepayment penalty.
Note that eliminating the prepayment fee will make the lender increase the loan interest rates. Prepayment fees cannot be applied when lending consumer-owner-occupied forms of loans.
How long does the loan approval take?
Typically, hard money loan lenders should approve your loan application within 7-14 days. Dependable direct money lenders can disburse the amount of cash applied for within three to five days in some situations if the financing is worth saving a deal.
This is one essential question amongst the questions to ask hard money lenders. Remember that if the type of consumer applied for is a consumer loan, the minimum funding time will be around three weeks due to the government-set regulations as well as disclosure requisites.
What is the validity length of your loan terms?
As you know, hard money loans are based on short term timelines. Some lenders have loan terms of twelve months up to five years while others offer only a year or two-year loan term. It’s the borrower’s responsibility to make sure the proposed timeline can work with the hard money lender’s terms.
Do you charge any additional originating fees for the hard money loan?
Some money lenders usually quote their interest rates as well as the origination points. The borrower should ask the hard money lender about any chargeable fees upfront for an easy budget since one will figure out all the additional costs earlier and add them to the overall cost for comparison with other lenders.
Title insurance, escrow, notary fees, and other basic transaction fees are charged by other traditional carriers but not by the hard money lenders.
Can you offer me a pre-approval letter for submission with offers?
Rookie investors who do not have a real estate property on contract seemingly intend to be making an offer soon to be in a better position for acceptance of their offers especially if they present a pre-approval letter from an experienced hard money loan lender.
As soon as the borrower submits the loan application, the hard money lender is able to regulate whether the investor is going to get the requested loan and the amount of cash they are going to grant them.
Whenever the investor wants to submit an offer to another lender, all the borrower has to do is contact the initial hard money lender and request them to craft a short-lived letter to prove to the lender that there’s a financial back-up for the next purchase.
Can one get prequalified for a private hard money loan?
In some cases, some borrowers are worth receiving the loan money before they even need it. An investor might come across a hot investment deal that they wouldn’t want to put their eyes off. Some deals are too good to see them fade away.
Occasionally, the hard money lender grants the money quickly to help them make their purchase as soon as they can. A lender may consider giving the loan offer to the investor instantly especially if they are refinancing or making an investment on a very promising project.
How much cash do you offer?
When setting loan limit amounts for their borrowers, different hard money lenders consider different factors when deciding on the maximum and minimum amount they can lend. These factors include:
The loan ‘Loan to Value’ (LTV) ratio of the investor’s property. This is the amount of cash you are applying for compared to the total value of your collateral product.
The ‘Loan to Cost’ (LTC) ratio of your real estate property. These criteria the same as LTV only that when the lenders are considering the LTC, the hard money lender focuses on your property’s overall cost to determine the amount of money they are going to grant you.
The projects After Repair Value. This is the total value of your Real estate property after fixing up, renovations, and other improvements. Therefore, some lenders may look at your property’s potential to determine the loan amount you qualify for.
Maximum and minimum loan limit rates. Other lenders may not only set upper loan limits but also lower ones as well.
Borrowing history. If an investor is applying for a follow-up loan, a lender is most likely to approve their request due to a good history thus better loan terms.
What are the loan repayment terms?
An investor should work towards repaying the hand money loan on time to increase their credit score with the current hard money lender. This question to ask hard money lenders depicts one essential factor that can positively impact your loan terms with the lender.
Frequent loan repayments done on time may improve your loan terms since you might qualify for more loans, higher loan limits, and fair interest rates upon your loan disbursement. Ask your hard money lender about their loan repayments to be made and for how long the loan term will be valid.
Can your loan be extended?
Lastly, it is very important for the borrower to understand whether the current loan can be extended in case of any emergencies or forthcoming unseen circumstances. Getting to know if you can have an extension on the loan will help you prepare for any risks or emergencies that might make your investment fall apart.
Make sure you go through the questions to ask hard money lenders before applying and receiving any financial help from the individuals.
