How to Start Seeing Success with Hard Money Lending

We live in troubling financial times, and nowhere is that more evident than in the housing market. Financial shifts have taken a bite out of people’s credit and cash flows, and potential home buyers are suddenly discovering that they no longer qualify for home loans under new banking guidelines.

Not surprisingly, the banks are concentrating their efforts on premium-grade buyers and properties, leaving everyone else out in the cold.

But there is an alternative that’s starting to become more and more popular – the notion of “hard money” or private loans.

What is a Hard Money Loan?

If you’re new to mortgages or lending in general, you may not be aware of hard money lending or private loans. Both of these terms essentially refer to the same thing.

In short, private money lenders are using their own capital to make the loan, therefore, they’re not beholden to the same regulations and requirements as traditional lending institutions, like banks and credit unions are.

Because private money lenders are using their own money as the basis for the loan, they are in complete control over deciding how to handle things like the interest rates, approvals, the degree of creditworthiness and so on.

So Why is it Called “Hard” Money?

Hard money refers to the “hard” asset being used to secure the loan. In this case, it’s typically real estate. Because there’s only so much real estate available, hard money lenders use it as a sort of assessment in place of traditional lending requirements like a credit score.

To put it simply, if a hard asset, such as a single-family home, were used to help secure the loan, a lender could easily look past issues that would ordinarily trip up a bank – like credit score or income verification requirements.

When using the borrower’s property equity as their security, the lender enjoys much more flexibility in deciding the terms of the loan, and this in turn opens up new opportunities to borrowers that may not have ordinarily been available through traditional lending routes.

When is a Hard Money Loan the Best Option? 

There are many cases where a hard money loan can be the best option for your buyer. Oftentimes, with our roller coaster financial market, buyers simply don’t have the credit score needed to close on a traditional loan.

In other cases, owing to the popularity of “fix and flip”-type reality shows, people become invested in buying homes in need of repair to fix up and sell. Unfortunately, banks are not in the business of owning real estate, and they typically won’t invest in some starry-eyed buyer’s renovation dream if they can avoid it.

Banks and credit unions have drawn a hard, and almost unattainable line in the sand for prospective home buyers, and it’s easy for those buyers to feel as if the institutions they once trusted has left them high and dry.

Banks see things purely in black and white. They care about numbers and profits, not reasons. This is why buyers are often written off and denied their loan application. Banks can’t see (or don’t care about) the bigger picture. The buyer may very well have a low credit score, but they have that score because they’ve bought an investment property with cash and need the extra funding to make repairs. After that, they’ll be able to pay down their debts and perhaps attract long-term tenants.

Still, the bank doesn’t see past the low credit score. Hard money lenders do, and this affords them much more freedom and leeway in terms of loaning funds where traditional institutions fail.

Deciding to Work with a Hard Money Lender – What To Look For and Avoid 

Should you decide to seek out a hard money lender, it’s important to note that privately-funded loans are not regulated in the same ways as traditional banks. That means you should put even more of your attention toward working with a reputable, experienced lender. Here’s what to look for and avoid:

Look for Reasonable Upfront Fees

It’s not unreasonable for a lender to require an appraisal, but less than ethical lenders will ask a borrower to submit large sums of money – putting it all under an umbrella of “due diligence”. Deals like these seldom close at all, and the borrower ends up short thousands of dollars.

What’s a good upfront amount to look for? If a lender asks for more than 8.5% of the total, look elsewhere.

Avoid Brokers Who Claim to Be Lenders 

Some brokers are downright underhanded and will claim to be direct hard-money lenders while brokering the deal to another party. Of course, they won’t tell you this at all, so you’ll need to understand who the key decision makers are throughout the lending process.

That also means taking steps to get verification that your lending company does indeed fund its own loans.

Look for Brokers Who Disclose All the Terms Openly 

If there’s an issue that could potentially impact a hard money transaction, brokers and borrowers alike have a right to know about it. From tax liens to title issues and much more, problematic information that could cause a transaction to fall through needs to be disclosed and understood fully so that said issues can be resolved and the transaction can move forward as planned.

Avoid Bait-and-Switch Deals

Some lenders will neglect to detail specific aspects of a deal, including what documents are required, whether or not the site needs to be inspected, any environmental considerations and so on. By taking the time to understand each step and the time required to complete it, you can help keep the loan process running smoothly.

Look for Terms That Are Realistic and Follow the Market 

And finally, a piece of sage wisdom that stands the test of time: if a deal seems too good to be true, it probably is. Trust your gut and do not move forward with the transaction. Hard money lending may be decidedly different than conventional lending, but it does pave the way for alternative ways to close deals that would ordinarily never see the light of day.

If you have more questions about hard money lending, please call us or email LBC Capital to get instant response.