Knowing what they expect from borrowers is essential if you are looking for a private hard money lender. Private lenders will typically want some collateral as security against the loan.
This can be your home or property that you own outright, a second home with equity, or investment property where the investor has a mortgage.
The first step in securing a private hard money loan is to contact potential lenders and find out if they offer loans in your area and what their terms are. It’s imperative to be effective in the application for hard money. Here are some guidelines.
Determine How Much Money You Want to Borrow
Before you contact a hard money lender, you must know how much money you want to borrow and for what purpose. Most likely, it will be for a real estate investment as a short-term loan to purchase a property. In this case, the lender will expect you to have 20 percent of your funds as equity.
It can also be a downpayment on the property that you want to purchase. However, this can vary from one lender to another. If the borrower has been investing in real estate for a long time, he may not need cash from hard money placed with him because he has plenty of his capital to invest.
Compare Different Interest Rates
Since you will be shopping around for a hard money lender to find out what interest rates they are charging, you should compare the amount of interest and other fees before deciding who to borrow from.
What points are being charged? Are there any origination fees? Will the borrower have to pay late charges if he goes past due on his monthly payment? You should get all these fees in writing before signing a note or agreement with a private hard money lender.
Nowadays, the internet can give you exposure to the different hard money lenders available. You can find a website that offers you a directory on the potential lenders with their reviews.
It can help you in making a better decision on which one to approach. This can be very significant when venturing into hard money lending for the first time.
Shop Around for the Best Lending Terms
When applying for a loan, make sure that it fits your particular situation. Make sure you qualify for the loan by verifying income and employment information and checking credit scores and debt-to-income ratios.
When shopping around, make sure that the rates and terms are in line with what you can afford and that you can close the transaction quickly, no longer than 30 days.
When applying for a loan through a private hard money lender, make sure your application is clear and concise to ensure it is processed as fast as possible.
Have all the information available before you begin filling out an application. Most importantly, make sure you know how much to borrow and for what purpose.
Have Your Documentation Ready
Having all your documentation ready before contacting potential lenders will help things move along faster once you find a private hard money lender.
Be prepared to have a list of your financial institutions, current mortgage balances and monthly payments, past two years’ worth of tax returns, and any other documents that can help facilitate the transaction.
If you borrow from a private investor instead of a bank, he will expect to see cash-flow statements for at least the last six months.
Make Your Application Easy to Read and Complete
The more complete and accurate your Private hard money loan application package is, the easier it will be for lenders to process.
There will be fewer forms they need to request from other sources such as credit bureaus or property appraisers. The less time spent on verifying information, the faster a lender can get to a decision.
When seeking out private hard money lenders for your needs, make sure that they consider all of your qualifications and that their interest rate is competitive with others in the lending business.
Make sure the loan fits into your overall financial picture and that it works within your cash flow forecasts. If you use this process for applying for Private Hard Money Loans, you will be guaranteed to make the right choice when dealing with this type of lender.
Pay Attention to Details
When a borrower is pre-approved for a hard money loan, he should be made aware of details such as when the loan will be funded – usually in five days or less if you have been pre-approved and can provide all documentation requested by the lender. If not, expect at least 30 days from application to funding.
Also, know that there may be an origination fee, discount points (used to buy down interest rates), and other fees associated with the transaction. Understanding these costs before securing a hard money lender will put you in a better position once you find one willing to work with you.
Another critical aspect to keep in mind when seeking out a private hard money lender is having collateral for the loan. This collateral will usually need to be something of value and could include but not limited to:
- Real estate, such as undeveloped land or property with an existing structure
- Land only loans – where it is just the land that secures the loan
- Personal assets such as stocks, bonds, and other securities
When pre-qualified for a hard money loan, your lender will likely use an appraisal to determine fair value in the asset being used as collateral. If not, expect a much higher interest rate than usual because the risk factor goes up considerably. You should also make sure you have enough income to pay the monthly payment using your home as collateral.
Choose the Right Term Length
The term length of your hard money loan will depend largely on the collateral being secured. If you use land with existing structures as collateral, expect a maximum term length of one year, while loans against undeveloped properties may stretch up to three years.
If you are seeking out private hard money lenders for some reason, make sure that you know what they can offer and if their rates are competitive. Also, make sure that the terms work within the structure of your overall financial picture.
There are many ways to get a hard money loan approved, but it is vital that you know what the lender can offer and if their rates are competitive.
You can compare the interest rates and lenders’ reviews at relevant online websites. Also, the more complete your application package is, the easier it will be for them to process because they won’t have to request information from other sources such as credit bureaus or property appraisers.
If you make sure there’s collateral in place before securing a private hard money lender, you’ll be able to do so without increasing the interest rate significantly.