Hard money loans are a popular option for borrowers to quickly fund real estate projects with minimal documentation. However, these loans come with specific risks and challenges. Borrowers need to know the most common mistakes when applying for and using these loans. In this blog post, we'll discuss the top five common mistakes to avoid with hard money loans.
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New To Hard Money? Start Here
If you’re like most people, you always buy or refinance with a traditional 30-year fixed rate mortgage. You've never considered using a hard money loan — and maybe aren't sure what it actually is. But, there is an entire group of people in the real estate profession who use these short-term private loans several times each year to buy, sell and renovate properties. This blog post will explain who these people are, and why they're a good fit for a hard money loan.
Hard money loans for bad credit used to be a thing back in the housing bubble years of 2003-2007. Borrowers with low credit scores (350 to 550) or recent foreclosure activity could get a hard money loan — assuming they had enough equity in their property, which was often the main qualifier for financing.
Every week, FCTD receives inquiries from people who are not good matches for hard money loans. It's important to remember that hard money loans are primarily used by real estate investors as short-term financing solutions to acquire vacant commercial properties, or properties needing major renovations before qualifying for long-term bank financing. This active and experienced real estate investor is the ideal borrower, and best positioned to secure hard money loans. But in this blog post, I want to discuss the opposite – the borrower who is not a good fit for a hard money loan – and suggest alternative solutions better suited to these financing needs. It can be frustrating to waste time pursuing a loan that just doesn’t exist in the hard money lending world.
If you’re new to hard money lending, you’re probably not familiar with the pricing structure or what “normal” hard money loan pricing, interest rates, fees, and closing costs look like. This is perfectly normal. Unless you’re a homebuilder or active real estate investor using hard money several times each year, you shouldn’t know about these types of loans. Hard money loans are often a loan of last resort for buyers whose bank loan applications are turned down at the last minute.
You’re buying a property and your bank financing is turned down. Your real estate agent might recommend you find a hard money loan to close the transaction. Searching online, you notice a lot of information for hard money loans, and additional information about something called private money loans — which seem like the same thing. And you’d be mostly right. But while they’re very similar, there are some differences between the two terms.
If you’re seeking private financing for your real estate project, be aware that most hard money loans have a document called a Personal Guaranty. This means that even if the loan is technically for an entity that you own or control, such as a limited liability company (LLC) or corporation, you, and possibly all the partners in the entity, must individually guarantee full repayment of the loan.
When real estate investors come to me for a hard money loan, they may or may not need to have a formal appraisal of their property. Appraisals in hard money are hit or miss — dependent on which lender the mortgage broker uses, how that lender is structured, and what the lender requires for a valuation prior to funding the loan.
If you’re taking out a hard money loan, one thing to consider is setting up an interest reserve, which can cover the monthly payments for a few months or even the entirety of the loan − whichever you prefer. An interest reserve can be a great tool for managing the cash flow of a project, enabling you to focus on the building rather than the finances.
A hard money loan balloon payment is the total principal balance of the loan plus one monthly payment due in full at the end of the loan term, which is usually 6-24 months from the start of the loan. Balloon payments are a common feature of hard money loans as most are short-term bridge loans with interest-only payments rather than 30-year amortizing loans like conventional mortgages.