Hard money loans are short-term bridge loans given by private money lenders to borrowers, often for real estate investing. Unlike traditional banks, these loans come with higher interest rates and shorter repayment periods, typically 6 to 12 months.
Private money lenders use the property to be purchased as collateral, reducing the risk for both parties. Below, we’ve prepared a detailed overview of how to find hard money lenders. But first, let’s look at the hard money loan requirements and how you can quickly secure the loan for real estate investing.
What Hard Money Lenders Look For In Borrowers
Before qualifying for a hard money loan, the lender will weigh the risks of going into the business with you. They will want to be sure that all their money will be back at the end of the loan period. Here are some of the requirements that hard money lenders will be looking out for:
Property Value
High-value property is more likely to sell, so this will signal a good deal. For many lenders, the property’s value will also be determined by its location and the current housing market.
Overall Financial Strength
The number of cash reserves you have should be enough to pay the upfront fees and monthly payments. Having a steady income is a good indication of financial strength, and the lender will most likely consider your project and loan request.
Real Estate Investing Experience
Hard money lenders often prioritize borrowers who have a solid strategy of repaying the loan. If you are a seasoned real estate investor, you’ll have a competitive advantage over other borrowers. Still, you’ll need to meet the other requirements.
Property Down Payment/ Equity
Private money lenders will require that you make a down payment of 20% to 30% before they can fund your real estate investment. The exact amount you’ll pay depends on the type of property you want to buy and your experience in real estate investing.
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How to Find a Hard Money Lender
Finding a hard money lender in the market shouldn’t be a challenge. You can start by running a thorough online search for hard money lenders in your locality. Similarly, you can leverage local real estate investor networks to find reputed lenders. Checking for referrals in business or investor sites could also work best if you want to explore more options.
Once you’ve compiled a list of potential lenders, go ahead to choose those with the best lending terms. Your sorting criteria should include the lender’s reputation, industry experience, fees, interest rates, and quality of customer support. Lenders that score very low in customer support may be challenging to work with, especially if you aren’t one of their recurring customers.
Where possible, connect with each of the hard money lenders you’ve picked to confirm their quality of services. An effective way to learn more about the lender is to ask direct questions about their services and listen to their response. If the lender cannot provide critical information, such as the names of the title companies they have worked with, they could probably be hiding something.
How to Spot Legitimate Lenders to Avoid Scam
Real estate investing has seen such a boom over the years, and the number of hard money lenders has also increased. Unfortunately, not all the private lenders in the market are there to do genuine business. Some are con artists looking to swindle money from unsuspecting real-estate investors. Before we look at how to spot a legitimate lender, below are the common types of hard money scams:
- Bait-and-switch lenders – this group of lenders promise low fees and lower rates but will suddenly change the terms before closing the loan. They do this to attract borrowers before revealing the actual loan repayment terms. Working with such a lender may be inconvenient as they are not straightforward and true to their word.
- Identity thieves – these lenders aren’t in the business of lending money but of stealing your personal information. Most of them only operate online with no physical location and will require that you submit loan documents online. These actors will then steal sensitive information such as your name, date of birth, social security number, bank details, etc. Ask your lender if they have a physical office and check if their site is secure before submitting anything online. Similarly, be wary of the information you’re asked to submit on the loan document.
- Fee collectors – this group poses as legitimate lenders and may even have a temporary physical office. They will promise fast processing time, moderate rates, and generous loan amounts. But in exchange, they will charge high upfront fees. And once they receive these fees from a couple of borrowers, they shut down the office and disappear. Finding a reputed lender will definitely solve this problem.
Avoiding Hard Money Lending Scams
A legit hard money lending business will be straightforward about its terms of service. They won’t also coerce you into signing some documents and sending them online without a one-on-one visit. Additionally, they will have nothing to hide, and any question they won’t answer will be justified with a good explanation. Here are some characteristics to look for in a legitimate lender:
- The rates are reasonable – any lender that promises anything below 7% could be using that as bait. Similarly, rates above 20% could be exploitative.
- No hidden fees – a legit lender will communicate all the costs upfront during the consultation. Any lender that suddenly introduces new fees before closing the loan could be a scam.
- The property serves as collateral – hard money lending requires collateral, and you can either use one or more properties for that purpose. However, if the lender has no interest in the property or doesn’t mention any collateral, you are probably working with a bad actor.
- No ambiguous instructions – the lending instructions should be straightforward and easy to understand. This avoids ambiguity in terms of fees and other loan repayment terms.
- The overall loan qualification requirements are reasonable – a legit lender should be wary of getting back their money. So, they should have selection criteria to help choose serious borrowers. If the requirements are too friendly with no restrictions whatsoever, you could be in for a bad deal.
Find a Legit Hard Money Lender Today
Now that you know how hard money lenders choose qualifying borrowers, you can polish your weak points to boost your odds of success. Additionally, you should always be on the lookout for hard money lending scams to avoid losing your money or sensitive personal information. The solution is to do your thorough research and work with reputed lenders with a positive track record.
