A hard money loan refers to a loan that’s given based on the value of an asset such as a real estate property, says TheBalance. Private companies and investors issue these kinds of loans. And since they are high-risk, they attract higher interest rates than conventional loans (source). You can apply for these loans to fund projects lasting for a few years or months.
The loan is secured by the property being purchased or improved, not by the borrower’s credit history. However, these loans are usually more expensive than standard bank financing, but they offer borrowers the flexibility to get financing when they cannot secure a traditional bank loan.
If you need this type of loan, there are factors to consider.
Important Factors to Consider
When choosing hard money lenders Texas, one of the most important factors is the loan type. Hard money lenders basically offer many different types of loans. Most common are commercial loans, residential loans, construction loans, and refinance loans. Here is a breakdown of each loan type:
- Commercial Loans – Loans for purchasing non-residential property
- Residential Loans – Loans for purchasing single-family homes or multi-family properties with up to four units
- Construction Loans – A draw schedule (a process of getting money in increments) that allows you to get full funding for your project based on completed work
- Refinance Loans – Used to refinance all or part of an existing real estate loan
Additionally, some hard money lenders also offer bridge loans, fix and flip loans, no documentation loans, and blanket loans. Each of these types has its own unique set of advantages and disadvantages. To learn more about them, visit our article on choosing between different types of hard money lender
Fees and costs
Various fees can be included. For instance, there are origination fees, administrative and processing fees, inspection and appraisal fees, title insurance, escrow fees, and legal and closing costs. If you’re not a real estate expert, you might not understand all of these. So when you see them on a list of things to pay for, don’t skip them.
All of the above are related to making sure the investment property is in good shape (e.g., inspection and appraisal), that the transaction conforms with state laws or that you’re protected against unforeseen circumstances (such as title insurance). It’s essential to keep this in mind when considering how much capital will be required upfront to secure a hard money loan.
How do they treat you?
Remember, these people will be your business partners, so it’s essential to choose someone who will be a good one. Check if they respond to your questions promptly or whether they have good communication skills. Most importantly, make sure they know what they’re doing. If you think it will be challenging to work with them, they are not the right lender for you.
Term of the loan
Hard money lenders typically offer short-term loans for heavy projects like property development or real estate investments. Such projects require large amounts of capital upfront and might not be feasible with traditional financing options like bank loans or personal credit cards. Make sure the terms of your loan are sufficient to cover all aspects of your project to avoid any unexpected problems down the road.
Paying attention to the loan term is important, as it can significantly affect how much you pay in interest. If you’re looking for a quick cash infusion with a short-term loan, keep in mind that you’ll pay higher interest rates given the fact that you’re taking out the loan for a shorter period. Conversely, a long-term loan would be preferable if you plan to undertake more complex deals with more drawn-out investment timelines, given its lower interest rate.
As a hard money lender, a company’s experience is one of the biggest factors to consider. With experience comes the ability to overcome many of the challenges that can come up during the course of a project. The more experienced company or individual is likely to have already “been there and done that,” which means they know how to handle these situations quickly, efficiently, and cost-effectively. When an inexperienced lender runs into an issue, it can cost you time, money, or both.
Reputation and review process
A hard money lender’s reputation is critical. Do your due diligence to find a reputable lender with strong underwriting practices and a clear approval process. The best way to separate the good from the bad is to check their online reviews. Also, look for transparent lenders about their decision-making process so you know what to expect before applying.
Track record of success
In addition to good reviews, you want to choose lenders who have a track record of success in the industry and are experienced in what they do – especially if this is your first time borrowing from private investors. A well-run hard money lending company will be more likely to approve you for funding and have better terms than an inexperienced or poorly managed lender.
Rates and fees
The rates and fees offered by the lender will affect your bottom line. Therefore, it’s essential to take those into account when making a deal. While hard money loans are significantly more expensive than conventional loans, the terms can still vary greatly from one lender to another. Shop around and ensure you get a reasonable rate on your loan before signing any paperwork.
When choosing which hard money lender is right for you, it’s important that they have extensive knowledge in their field and a good reputation with other customers. This way, you know they’ll treat this transaction fairly without taking advantage of every chance.
Online reviews and testimonials
Do some research before choosing which hard money lender is right for you. Look up customer reviews online so that if there’s anything bad about them out there, it won’t come as such a surprise when something goes wrong later down the line.
Finally, hard money loans can be used for almost any large expense, including paying off big credit card debts, funding business ventures, or even purchasing a second home. So, you can apply for a hard loan today.