Finding the perfect investment property involvesa lot of research. And once you are able to locate the right one, you will need to gather the funds to buy and fix it up. The problem is that no bank will be inclined to give you a mortgage on it. So how are you supposed to go about completing the project? This is where a hard money loan comes into play.
What is hard money?
Like any other loan, it’s a sum of money that is borrowed from a lender. The borrower acquires an amount while the lender earns a monthly interest on the loan until it is paid back. A contract lists the exact terms and conditions of the loan. It’s usually a short term loan so that the property can be renovated and put back on the market for resale. Typically the lender charges a one-time processing fee upfront.
Where can you obtain a hard money loan?
It can be acquired from individual investors or an investor group. The loan is backed by a physical asset – the property that is being purchased. So, it’s usually easier than getting one from a bank or credit union based on the borrower’s credit score.
Who needs it?
These types of loans are commonly used in real estate investing. Most conventional lenders, such as financial institutions, are not comfortable with lending money for risky investments. They are more inclined to grant loans for stable investments where there is a greater likelihood of having the loan repaid. Hard money loans are beneficial for several people.
- An investor who wishes to purchase and flip a distressed property has limited options. Obtaining funds quickly can be a problem. Therefore real estate investors who need to do a gut rehab or a quick property resale regularly use hard money loans.
- Investors who want to purchase real estate properties in order to earn an income may also use hard money loans. They secure them initially until the property can be stabilized. Once that is achieved, an investor will be able to obtain a traditional mortgage at a lower interest rate. This way they can pay off the higher interest hard money loan.
- It’s also used by people who are unable to secure a mortgage from a bank. This might be due to a poor credit score, even though they have enough equity in their property. Ittypically happens when an owner faces foreclosure on his property.
How can you tell if a hard money lender is reputable?
It’s important for borrowers to determine whether a lender is reputable or not. To avoid wasting time and money and dealing with disappointment and lost opportunities, a borrower should research a prospective lender using the following techniques:
- Ask for references from clients, previous borrowers, and mortgage brokers. It’s not enough to read online reviews; consider talking to them.
- Think about dealing with a local mortgage broker who has transacted with that lender before.
- Confirm that the lender has a valid Real Estate Broker License.
- Research if any complaints have been filed against the Real Estate Broker License.
- Remember to verify with the Better Business Bureau (BBB).
- Consider asking about the lender’s reputation at industry events to get a broader picture of how they are represented in the community.
Should a hard money lender be licensed?
This can get complicated depending upon the state of residence and the type of real estate. Typically most states require the individual to be a licensed broker-dealer if it involves brokering, lending, and referring to residential mortgages. However, a license is also required if that person is lending capital that belongs to other people or corporations. Even though a permit may not be needed for brokering commercial deals, many states still require a loan officer license (LO Lic). This is the case when a real estate loan is being initiated. Laws and codes differ from state to state. So, everyone involved should research before beginning any dealings related to real estate, hard money investing, and securities. If a hard money lender does not have the appropriate license, they could receive indictments. These pertain to real estate fraud, investment schemes, securities fraud, soliciting securities, or brokering real estate without a proper license. Anyone will tell you that no amount of money or deal is worth going to jail for.
How are hard money lenders regulated?
Hard money lenders are licensed differently from traditional lenders. They have less regulatory scrutiny. They are more willing to overlook certain non-negotiable criteria to issue a loan than banks. This is applicable as long as there is potential in the property that is being purchased.
But even so, these institutions are regulated at the state level via the Department of Real Estate. And it’s crucial that at least one person associated with hard money lending has a valid Real Estate Broker License. Keep in mind that additional licensing requirements might also be necessary depending on state laws.
It’s essential to understand that cross-state transactions fall under the jurisdiction of both states involved. You must be aware of each state’s respective requirements.
About Michelle Joe: Michelle Joe 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 heron twitter: @michellejoe524