Since the credit crisis of 2009, banks made it harder to get loans – especially for real estate investors. Buying real estate with a loan became much harder, banks began asking for stricter income requirements and lower LTVs. This problem persisted through a period in which interest rates were at an all-time low.
Hard money lenders were able to fill this void – providing real estate investors with fast approvals and more aggressive underwriting and the money needed to grow. Still, most borrowers have outdated views of the private lending industry.
Hard money rates are high, but not extremely high compared to retail interest rates. For much of the last decade, the federal government provided money to banks at almost zero cost – private lenders simply can’t compete with that. But the speed of approval levels the rate scales when taken into account. Normal bank loan can take 60 days longer to close compared to hard money. Finishing your project 2 months faster is worth a lot of money, especially for fix and flip investors who need to turn inventory fast.
Investors with bad credit have an easier time to qualify for a loan with private lenders – but not all applicants have bad credit. Most investors looking for a private financing are looking for a fast approval process. Hard money lenders have a shorter approval process that requires less documents and less time.
Hard money lenders use asset-based lending – focusing on the collateral, not the individual. So burrowers who fell on hard times and have limited credit can still qualify for capital. It opens the door to less deserving communities – which studies show are biased against people of color.
Hard money loans are regulated in all 50 states – and lower rates than the typical pay-day loans and unsecured private loans. In fact, most lenders will not approve a loan if they think the burrower can’t pay it back. Hard money loans are secured by a written contract – by which most burrowers hire an attorney to review and approve the transaction. Private lenders still need to follow bankruptcy rules in order foreclose on a property following a default.
Private loans require less documents than a traditional loans, but you still need to provide some information to get approved. The most important part is the appraisal – to verify that the collateral/property is worth enough to justify the loan amount. Other documents you will need to provide:
Most of the approved hard money applications require the borrower to put money down. ‘Skin in the game’ means the burrower is invested in the success of the project. Lenders want to know that you have the ability to pay back the loan, and putting money down is a good sign of financial security. Here are some of the documents you’ll need:
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