Hard money loans can be a quick way of getting funds for your real estate property. But before you take the loan, you need to understand everything concerning hard money lenders in Texas. In the past, some shady lenders tarnished the hard loan industry by attempting to give very risky loans to borrowers to foreclose on their property. Fortunately, these lenders no longer exist. However, some stigma is still lingering on the lives of investors who haven’t found reputable lenders.
Hard money lending may be a little challenging, so you need to know what you’re getting into before deciding. This article discusses everything you need to know about hard money loans.
What’s A Hard Money Loan?
It’s a loan that’s given on a short-term basis – about 12-24 months – by investors or private individuals to purchase or renovate a property. The amount you can borrow depends on the renovation cost, the property’s purchase price, and the After Repair Value (ARV). These types of loans require property as collateral. Most investors who resort to this type of financing are those without a good credit history or need a short-term loan that a bank can’t give. This loan requires you to make monthly interest payments and a balloon payment at the end of a contract.
Hard money lenders are concerned about your property’s value rather than your credit score. If you can’t get financing because of a short sale or recent foreclosure, you can still get a hard money loan, provided there’s enough equity in the property you’re using as collateral. However, some hard money lenders consider your creditworthiness.
Types Of Property You Can Use To Acquire A Hard Money Loan
You can get hard money loans on any property, including industrial, commercial, multi-family residential, land, and single-family residential. Some loaners specialize in specific types of property like residential and may not give you loans for land. That’s because they have no experience in that area. Most hard money lenders offer niche-specific loans that they’re most comfortable with. It’s best to ask a lender the type of loans he gives before signing a contract with them.
Some loaners also don’t lend money for owner-occupied residential properties because of additional regulations and rules. However, if you’re willing to go through the hustle of paperwork with them, you may end up securing a loan. All lenders give loans to those who don’t have any loans, though some may give you a loan if you have another one.
Deals You Need To Use Your Hard Money Loan For
A hard money loan isn’t suitable for all deals. If you want to purchase a residence with good credit, income history, and without foreclosures or short sale, you should opt for conventional financing. You should settle for a hard money loan if banks aren’t lending and you have a short period for closing in on a deal. You can take these loans to finance fix and flips, land, construction, or when you have credit issues.
Who Can Use A Hard Money Loan?
These loans can be used by investors who need money to finance a project quickly. Most hard loans are financed within a week, unlike banks that take 30-45 days. Applying for a hard loan takes a day or two, and in most cases, the loan is approved on the day you finish the application.
The ability to get quick loans gives investors an advantage. This is prominent, especially when you need to buy a property with many bids. A quick source of financing can help you get the seller’s attention and give him an offer as the other buyers are looking for conventional financing.
You may also opt for a hard money loan if you have credit issues with the bank. This may be due to low income, insufficient income history because you recently started a new job, or because of bad credit history. Hard loaners don’t look at this as long as you can pay their loans.
Interest Rates Charged On Hard Money Loans
Hard loan interests vary from region to region and from lender to lender. For example, hard money lenders in Texas have lower rates than other parts of the country because of numerous lending firms. Increased competition among these companies leads to a decrease in interests.
Compared to bank loans, hard money loans are riskier. That’s why these lenders charge higher-interest rates for their loans than that you’d be charged for conventional loans. Most hard lenders charge interest of between 10-15% depending on the loan’s lender and risk. Their points could be between 2-4% of the total loan amount. However, the points and interest rates vary broadly based on the loan to value ratio.
Some lenders may loan you a high percentage of the ARV and also pay for the rehab costs. This sounds great for the borrower. However, these loans’ risks are higher, and their points and interest rates are also higher. If you borrow a loan without making a downpayment, expect to pay a 15-18% interest. But if you want to use the loan to secure a more profitable deal, the exorbitant interests won’t sting you that much.
How To Find A Reputable Hard Money Loaner
You can find reputable hard lenders in various ways. One of the ways is simply to Google search ‘hard money lenders + your area.’ You’ll find companies or individuals that are near you and can loan you money. Alternatively, you can find them by attending real estate investor club meetings. These meetings take place in most cities and are well attended by hard money loaners who’re searching for potential borrowers. If you don’t find any hard money lenders at the meeting, you can ask the real estate investors present to recommend any hard money lenders.
Conventional mortgage brokers, real estate brokers, and other real estate professionals can refer you to reputable hard money loaners. From your network, find who’s the most recommended. Once you land on a name, contact him or her and book an appointment.
Hard Money Loans Pros And Cons
Hard money loans are among the most advantageous financing options that investors can opt for. That’s because very few loans can compete with it. However, it has its own caveats. Though its benefits are superior, it has downsides that you must consider before deciding. Here are the pros and cons of hard money loans.
1. They’re Flexible
The terms of hard money loans are flexible because you’re dealing directly with the investor. That can enable you to negotiate what’s best for you.
Unlike banks that take a long time to disburse a loan, you can secure a hard money loan within a few days or weeks based on your negotiations.
3. You Don’t Have To Worry About Credit Scores
Securing a loan for financing an investment property through a traditional mortgage isn’t easy. Conventional borrowers look at debt to income credit score, LTV ratios, and other indicators that you must meet before acquiring the loan. However, hard loners are more concerned with your property rather than credentials.
4. It’s Convenient
Banks may need you to provide your tax returns, income documentation, statements, and leases before considering to give you a loan. That may be tiresome and time-wasting. However, hard money loan processing doesn’t require so much paperwork or go-betweens, saving you time and money.
1. Higher Interest Rates
Though hard money loans are convenient, they have higher interest rates compared to conventional lending.
2. Short Repayment Schedule
Most hard money loans have payment periods of between 6-18 months. That may require you to make profits fast from the property you’ve bought to settle the loan.
Hard money loans have gained popularity amongst property investors. These loans can give you an edge over traditional financing methods. That’s because it can help you get capital faster without a lot of paperwork. However, it would help if you considered its interests before deciding.