How to find the right hard money lender for your next project
Just because you cant secure a traditional bank loan doesn’t mean you don’t have other options, you may have considered a hard money lender but where do you start? What should you expect from a potential lender, and what will a lender expect from you?
A quick Google search for private lender should turn up an endless array of financing options. Because you might need a specific type of lender to match your particular project an online search can prove to be a little overwhelming. You could always try to be more exact with your search terms, trying things like ‘private rehab loans,’ or ‘private construction loans.’ Being specific with your online searches may help you find the lender that is right for you, but this isn’t always the case.
Consider using one numerous lender databases available online to narrow down your financing options. The ideal database would allow you to aim your search for lender based on the amount of financing you need or will enable you to search for lender based on your specific project, (i.e., Renovation, construction, commercial, etc).
If you’d rather avoid the hassle of searching for a lender on your own, you could seek out a referral from a licensed mortgage broker. Local real estate investment groups could also put you in touch with lender they have worked with in the past.
If you find the right lender, the question then becomes what should expect from them and how do you know you’re getting the best possible deal.
What should you expect from a potential hard money lender during the application process?
Search relevant government databases to ensure your lender is licensed. Your lender should also be transparent throughout the process. Ensure that they meet their published guidelines related to fees and closing costs. You should also be wary of teaser rates offered by unscrupulous lender.
Know that every private lender is different and will have their criteria when it comes what they expect from you as a borrower. Ask your lender to be transparent about any documentation you might need throughout the loan application process.
Know what your hard money lender expects from you to get the best deal possible
This type of loan is often used to finance rehabilitation and construction projects.If your seeking financing for renovation or construction, a lender will want to ensure that you are competent and knowledgeable about your project. In these cases, before approaching any lender, have details about the property you wish to purchase, a budget for your renovations and thorough projections about the future profitability of your project. You build up your lender confidence and gain room to negotiate by demonstrating your understanding of a project’s potential.
You need to have a detailed understanding of what your property is worth to qualify for the best possible loan. A private lender usually bases the amount of financing offered on the market value of the property you are purchasing. You won’t qualify the largest possible loan if you don’t have a good sense of what your property is worth.
Important Considerations when Choosing a Hard Money Lender
Hard money lender are many real estate investors choice for funding, yet many just getting into the field know little to nothing about this lending option. Let’s take a look at what this type of lender can bring to the table.
Hard money lender are not held by the same regulations that banks and credit unions must operate under. Because of this, they can offer loans to individuals and businesses with less than stellar credit. Many are private individuals who specialize in several types of real estate investment strategies from multifamily to office to the fix-and-flip model. These types of loans are asset based, meaning that the lender will look at your collateral as the prominent element of the loan. These types of loans are good for investors just getting in to the real estate investment model.
Another positive to those that operate under less regulation is that they are much quicker to funding. This becomes important when an investor is looking to get into a property, do some quick renovations, raise the property value, and get it on the market or obtain a loan from a traditional lender that is based on the property’s new value. If you end up developing a long-term relation with a hard money lender, you will find that you can often receive the funds you need for that next investment property in as little as a few days, compared to a month or more from other types of lender.
Be sure to check the small print. Are you working with a hard money lender that offers a no-penalty clause for early payments? A pre-payment penalty states if you pay your loan back in full before the actual due date, a penalty will be assessed. The fee is percentage-based or the amount in interest that you would have paid for a set number of months. This can lead to tens of thousands of dollars. If you have an existing loan with a pre-payment penalty, be sure to assess fees before paying off the loan in full to determine if this is the right strategy for you.
Know Your Exit Strategy
While your property may be acting as collateral, hard money lender do not want to be in a position of laying claim and having to foreclose on a property due to unpaid debt. For this reason, they will want to know your exit strategy. An exit strategy is how you plan on paying off the debt. Most of these loans are short-term, anywhere from 3 months to five years, making this component an important consideration for both the lender and the borrower. A few options are to refinance with a commercial mortgage, renovate and sell, or pay the debt off with business capital.
Know your exit strategy before considering a hard money lender. Going in with strong collateral and a good exit strategy are keys when considering going after a hard money loan.
At Level 4 Funding, we work with hundreds of private hard money lender. Our rates start as low as 7.99 percent with terms that run anywhere from 3 months to 5 years. Call us to see if we are the right brokers for your next real estate investment deal.