Hard Money Loans: 25 Common Questions and Answers for Investors
You can finance your rental property investment in several different ways. One unique way to secure funding is to use a hard money loan. These types of loans offer quick financing for investors that need money–fast. If you’ve never heard of a hard money loan, today we’ll answer any questions you may have. Just keep reading to learn more!
A Basic Overview of Hard Money Loans
Hard money loans are short-term, non-conventional loans backed by real estate. They don’t come from traditional lenders, such as banks. Instead, they come from people or private companies, often investors.
Borrowers may seek hard money loans if they need access to capital quickly or if they don’t qualify for a traditional loan or mortgage. Unlike a traditional mortgage, hard money loans are secured by purchased property. If you want to learn more about hard money loans and lenders, stick with us as we go over common questions and answers.
25 Common Questions and Answers for Investors
If you’ve never heard of a hard money loan, you probably have many questions. Well, we hope to answer those with our list of 25 common questions and answers. So keep reading to learn more about hard money loans and lenders.
1. What is a Hard Money Lender?
Answer: A hard money lender is an investor that offers loans backed by real estate, generally charging higher rates but funding more quickly than banks. These non-conventional loans come from people or private companies that accept assets, such as real estate, as collateral.
2. What’s the Difference Between a Hard Money Loan and a Bank Loan?
Answer: Hard money loans are approved and funded much quicker than traditional bank loans. Additionally, the requirements to obtain a hard money loan are different. For example, banks generally look for substantial collateral and excellent credit, while a hard money lender mainly focuses on the collateral for the loan.
If you don’t repay a hard money loan, your lender can foreclose and “take back” the property. But on the other hand, bank lenders will require you to pay them back from your income.
3. When Should You Use a Hard Money Lender?
Answer: You might consider using a hard money loan if you need access to capital more quickly. Lenders can give you this access but may offer higher interest rates or up-front fees. But, you wouldn’t have to wait for approval from the bank and the long process to acquire your loan.
4. How Can You Get a Hard Money Loan?
Answer: The first step in getting a hard money loan is finding a reputable lender. Then, once you’ve explained the property you’re looking to purchase, ensure you have the proper documentation.
Depending on your lender, you may need specific information about the property you’re looking to finance. Additionally, make sure you have some evidence of your assets and tax records in case they need to see additional information.
5. Can You Negotiate with Hard Money Lenders?
Answer: Yes, you can often negotiate terms with hard money lenders since you’re dealing with an individual investor, not a bank. Since these loans rely on collateral instead of a borrower’s finances, it’s easier to negotiate with lenders.
6. What Kinds of Property Do Hard Money Lenders Work With?
Answer: Hard money lenders may work with several property types. For instance, they may lend on single-family homes, multi-family investments, industrial buildings, retail and office spaces, and more. It depends on your lender and what types of properties they specialize in.
7. Why Do Hard Money Lenders Exist?
Answer: Hard money lenders exist because it’s easier and quicker for real estate investors to secure funding and close on properties. Although banks offer lower interest rates, they often don’t provide the same speed and transparency as hard money lenders.
8. What Documents are Involved in a Hard Money Loan?
Answer: Some documentation you need for a hard money loan may include:
- Loan Application
- Tax Records
- Bank Statements or Proof of Funds for a Down Payment
- Deed of Trust
- Private Policy
- Fair Lending Notice
- Equal Credit Opportunity Act Notice
- Escrow Instructions
9. How Much Do Hard Money Lenders Charge?
Answer: Hard money lenders typically charge higher interest rates, ranging from 7 percent to 12 percent on average. Depending on your lender and their terms, there may be a down payment or additional fees.
10. What are Typical Hard Money Loan Fees?
Answer: Fees associated with a hard money loan can include deposit fees, underwriting fees, and origination fees of 1-2 points.
11. Are All Hard Money Loans Backed by Real Estate?
Answer: Most hard money loans are backed by real estate as collateral. However, some loans are not, for instance, when a hard money loan is backed by another loan from a third party.
12. Why Do Hard Money Loans Offer Higher Interest Rates?
Answer: Hard money loans have higher rates because they’re funded via private capital, which has higher expectations. On the other hand, banks can offer lower rates because they fund loans via retail deposits with minimal interest rates.
13. Is a Hard Money Loan Personally Guaranteed?
Answer: Some lenders require your loan to be guaranteed, but it depends on the lender and the terms of your hard money loan.
14. How Long Does It Take for Lenders to Fund a Loan?
Answer: It will typically take less than 30 days for a lender to fund your loan. In fact, most lenders can fund the loan in two weeks or less.
15. How Fast Do You Need to Repay a Hard Money Loan?
Answer: A typical hard money term is 12 months. However, some loans have longer terms, ranging from 3 to 4 years, depending on the situation and borrower.
16. What Happens If You Don’t Pay a Lender Back?
Answer: If you don’t pay your hard money lender, you risk losing the property or properties you used as collateral to secure the loan. You’ll need to either pay back the loan, make payments, or sell the property. If borrowers don’t address the situation, lenders can proceed by foreclosing on the property.
17. How Can Investors Benefit from Maryland Hard Money Loans?
Answer: Hard money loans have several advantages for investors that need capital quickly. Some of the main benefits include:
- Hard money loans offer a simpler and quicker application process and quick approval decision.
- You don’t need excellent credit to qualify for Maryland hard money loans.
- Generally, you don’t need a substantial down payment to secure a hard money loan.
- A hard money loan can be used as a bridge loan until you secure longer-term financing.
18. How Are Hard Money Lenders Different?
Answer: No two hard money lenders are the same. They differ from one another in several ways. For instance, some differences may include their criteria, the types of real estate they fund, minimum and maximum loan size, location, and more.
19. What Questions Should You Ask a Hard Money Lender?
Answer: Some questions you may want to ask a hard money lender before securing a loan include:
- What are your interest rates, and how many points do you charge?
- Are there any additional fees associated with the loan?
- How long will it take to fund the loan?
- How long of a term is available?
- What types of properties do you provide loans for?
- Is there a prepayment penalty?
- What loan-to-value ratio can you offer?
20. Can You Get a Hard Money Loan With Bad Credit?
Answer: Although some lenders will look at your credit history, you can still secure a hard money loan if you don’t have good credit.
21. What are the Disadvantages of Hard Money Loans?
Answer: Some disadvantages of hard money loans include higher interest rates, potentially more expenses, and their short-term use.
22. Where Do the Funds for Hard Money Loans Come From?
Answer: The source of funds for a hard money loan may come from several places. For instance, most hard money loans are funded by individuals or companies that accept investment properties or assets as collateral. Typically, lenders are also investors who want to generate higher returns rather than earn minimal interest rates with their money in the bank.
23. When Should You Use Maryland Hard Money Loans?
Answer: You may consider using a hard money loan if you’re willing to pay a higher interest rate for quick access to capital. You can often use a hard money loan to invest in real estate if you don’t qualify for traditional financing.
24. How Can You Find a Reputable Lender?
Answer: You can find reputable hard money lenders by searching online, asking for referrals, asking other investors, and more. Ask the industry professionals that you know to give you a referral. Then, do your research on the lender.
25. Can You Get a Hard Money Loan If You Have Another Loan In Place?
Answer: You can get a hard money loan if you have another one in place. However, you’ll have to get a new hard money mortgage to replace the existing one.
Want to Learn More About Maryland Hard Money Loans?
We’ve gone over a lot of the basics of hard money loans. However, there’s always more to learn when you talk to lenders and companies that offer hard money loans in Maryland. That said, if you want to learn more, reach out to your local Maryland hard money lender today!
Hard money loans can be a great way to start or expand your rental business. However, these unconventional loans aren’t right for everyone. Contact your local lender to learn more about hard money loans and see how you and your business can benefit.