Getting a Hard Money Loan for Your Real Estate Investment
In the world of real estate, it’s about knowing the opportunities and grabbing them when they come. As Lee Iacocca, business and management mogul said, “We are continually faced by great opportunities brilliantly disguised as insoluble problems.”
Investing in real estate (such as buying foreclosures) can be very lucrative. But it requires you to respond quickly when the right opportunities arise. Traditional loans will not be able to address this need to act quickly. Banks will take some time to process a loan application and lengthy financing is a turn-off to sellers. Also, banks are wary about lending money for this kind of business, which they consider to be high risk.
Hard loans provide quick access to funds
These are also referred to as bridge loans since this type of loan aims to provide a “bridge” from the purchase of the property to its resale. These are short-term loans, with the longest term up to only a few years. These loans have a quick processing time but are considerably more expensive, with high-interest rates and very low loan-to-value ratios (usually 60% to 70% of the property’s value).
Why use hard money loans?
There are situations where a hard money loan is a logical choice, despite its higher-than-average interest rate. There are investors who prefer the convenience and faster approval times of a hard money loan. There are times when you need to raise money to act on a quick closing. There are also instances when one does not have the kind of credit that will help him secure his desired real estate purchase. Even those who have a bank line of credit sometimes resort to a hard money loan if they need additional funds.
Qualifications to get hard money loan
- The property can be residential or commercial. For residential properties, owner-occupied residences may not qualify, as there are a lot of legal requirements that need to be met. This includes single-family residences that are vacation homes. For commercial properties, you can get a loan for office buildings, shopping centers and industrial properties.
- A first mortgage. Hard money lenders will want to be able to easily recover the money they loaned. That is why you can’t get a hard money loan to use as a second mortgage.
- Equity. The property to be purchased should ideally have instant equity, such as a bank-owned property. To make the purchase, you need to pay a down payment – 25% to 30% for residential properties and 30% to 40% for commercial properties.
- Cash reserves. An investor in real estate will need to have some cash reserves so that he can successfully see the entire project through. Lenders will like to ensure that you have additional funds to pay for repairs, outstanding debts on the property, insurance and legal fees, as well as the monthly loan payments.
- Exit strategy. This outlines how you plan to pay the hard money loan. You can indicate whether you plan to sell the property or have it refinanced into a subprime loan, a traditional mortgage or a new hard money loan. You can also point to other sources of cash you might have, such as the sale of a different property that you have.
To file the application, you need the following:
- Completed loan application form. This will ask for your basic information, as well as why you need the loan and your exit strategy. It will also ask you to provide information on the property.
- Photos of the property. Submit shots of the interior (preferably for all the rooms and any related amenities) and the exterior (the front, sides and back of the property). You should also include pictures of the street where the property is standing.
- Purchase contract. Even if this has not been signed, the lenders will like to see the terms of the contract and whether there are special escrow funding instructions.
- Proof of insurance. You need to present a policy (or at the very least, a quote) of insurance coverage for hazard and liability. If the property is damaged by a covered peril (fire or vandalism), the lender will be able to recover the loan.
- Preliminary Title Report. This is the initial report showing that there are no problems with the title.