If you’re looking to purchase any type of real estate property but you don’t want to put down a large sum of money upfront to buy it, a hard money loan may be a good option for you. While there are many benefits to this type of loan over traditional financing, it’s crucial to address several questions before you apply for a loan.
Where does the Hard Money Lender offer loans?
Different lenders offer support to different regions of the country. Some might be able to offer loans across multiple states, while other will focus solely on local financing. Obviously, a local lender will understand your marketplace much better, which means they will be able to take a more personalized view of your project than a national one will in most cases. Talk to potential lenders to see where they can provide funding.
How much collateral do you need to provide?
Hard money lenders lend money that’s secured against your real estate project. The value of your development/construction project is the collateral you provide in return for funding. Private lenders take into account the total cost of the project and what the finished development will be worth. Work with a lender who will be able to provide you with an estimated value, typically based on an appraisal, for the collateral you need to provide, depending on how much you want to borrow.
Does the lender check personal credit scores?
Many private money lenders are more focused on the details of your project and the collateral you can provide rather than your personal credit history. Though they may look through some of your finances to make a loan decision, credit scores don’t factor in as much as they might for banks or other traditional lenders. It’s critical to note that issues like bankruptcies, tax liens, open judgements, fraud, and other crimes may affect your loan eligibility.
What do the interest rates look like?
Hard money lenders often charge comparatively higher interest rates due to the additional risk they take on. Despite this fact, your monthly payments will often be interest-only and you’ll be responsible for paying off the principal balance at the end of the loan term. The interest rate massively influences how much you’ll repay, and a lender’s interest rates will fluctuate between 8-14% a year, depending on the purpose of the loan. You’ll also want to inquire about how they calculate interest. For instance, is it applied on a daily basis, or over a different time period?
Here’s a few more important questions to ask a prospective lender:
- Do you offer loan extensions? If so, how do your extensions work?
- Will I be charged a fee if I pay the loan off before the full term is up?
- What can I expect if I am late on a payment?
- Why should I choose you as my lending partner? What sets you apart from other hard money lenders?
- What’s the typical turnaround time from application to funding?
It’s important that you take notes during these conversations and evaluate how each lender communicates the answers to your questions. If you ever get the impression that you are not welcome to ask questions about their business practices, avoid working with them. A reputable and established money lender should ideally understand and appreciate your inquiries.
Hard money loans, if used effectively, can propel your investment to another level. While these tips may be a mere glimpse into the world of hard money loans for new investors, it’s important to not get discouraged. Before you consider a hard money loan for an investment, be sure to dive a little deeper and learn the latest industry trends, current prices, rates, or even talk to someone who has experience with this type of lending.
RCN Capital | Connecticut Hard Money Lender
RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing as well as long-term rental financing for real estate investors. RCN Capital also has flexible and competitive loan options available. Connect with us today to discuss your next investment.