Hard Money Do’s and Don’ts: Tips for New Investors

If you’re looking to invest in real estate, you’ll want to know your options when it comes to loans and financing the property. One popular option among investors is hard money loans. That said, these loans are unconventional, and they work differently from other loan types. So, it’s essential to know all the do’s and don’ts so you can have the best borrowing experience possible. Today, we’ll review when to use a hard money loan, do’s and don’ts, and tips for finding the right loan terms. 

Contents of This Article: 

• When Do You Need a Hard Money Loan?
• Hard Money Do’s and Don’ts
• Tips for Finding the Right Loan Terms
• Get in Touch With a Maryland Lender Today

When Do You Need a Hard Money Loan?

Hard money loans are ideal when you need fast, flexible financing. They’re also commonly used for unconventional circumstances where traditional funding isn’t feasible or available. Some of the most common uses of Maryland real estate loans include the following. 

1. Fix-and-Flip Projects- If you’re buying a run-down property to renovate and sell quickly, hard money is great because it offers fast funding, flexibility, and shorter loan terms.
2. Time-Sensitive Deals- Traditional loans can take weeks or even months to close, which is not ideal for some investors. On the other hand, hard money loans can be funded within just a few days, so you can secure competitive properties quickly.
3. Non-qualifying Properties- Homes with major repairs or code violations typically get denied by banks. However, hard money lenders focus more on the property’s value after repairs than its current condition.
4. Investors With Poor Credit- It can be hard to get a traditional mortgage loan if you don’t have great credit or consistent income. Luckily, hard money lenders base their approval on the property’s value rather than your financial history.
5. Bridge Financing- You can use a hard money loan as temporary financing until you can secure long-term funding, sell a property to pay off your debt or refinance with another loan.

Hard Money Do’s and Don’ts

Considering a hard money loan for your next investment or real estate project? Check out some of these hard money do’s and don’ts to help you make smart borrowing decisions.

DO’s

1. Understand the True Cost of Borrowing- Hard money loans have higher interest rates and fees, and it’s crucial to know all of these costs before signing off on a loan.
2. Have a Clear Exit Strategy- Whether you want to fix up and sell the property, refinance with another loan, or keep it for rental income, lenders will want to know your plans for repaying the loan. Having a clear, thoughtful exit strategy is key.
3. Prepare a Strong Project Plan- If you’re planning a fix-and-flip, you’ll want to show your lender your plan for fixing it up, including your timeline and budget for the project.
4. Vet Your Lender- Finding a reputable lender with transparent terms and positive reviews is crucial. Take your time searching for someone great rather than going with the first lender you find.
5. Provide Accurate Information- Be honest about your financials, investing experience, and the condition of the property. The more documentation and information you have, the better.
6. Budget for Interest and Unexpected Costs- Make sure to set aside extra money for holding costs, delays, or unexpected costs that may pop up.
7. Communicate Often- It helps to keep your lender updated with your progress or plans, especially if your timeline shifts or issues pop up.

DON’Ts

1. Rely on Hard Money for Long-Term Financing- Hard money loans are short-term loans, meaning you can’t rely on them for long-term financing. It’s crucial to use them strategically.
2. Overestimate the After Repair Value (ARV)- Instead of being overly optimistic, you’ll want to be more conservative with your estimates and market expectations, especially when it comes to your after-repair value (ARV).
3. Accept the Loan Without an Exit Strategy- You risk losing the property without having a solid plan to repay the loan.
4. Assume Speed Means No Due Diligence- While you can get a hard money loan quickly, that doesn’t mean lenders don’t require thorough documentation, inspections, and appraisals. You’ll want to be prepared with all of this information.
5. Hide Issues With the Property- If issues pop up, it’s crucial to communicate with your lender. After all, transparency helps build trust and can prevent further delays.
6. Ignore Laws and Contract Terms- You’ll want to read your loan documents carefully and consult a real estate attorney if anything seems unclear.
7. Delay Loan Payments- If you miss a loan payment or deadline without explaining why or when you can pay it, your lender may go forward with seizing the property.

Tips for Finding the Right Loan Terms

If you’re looking to finance a real estate investment, it’s important to know the hard money do’s and don’ts to help you make smart financial decisions. Here, we’ll review some tips for finding the right loan terms for your investment. 

1. Compare Multiple Lenders
2. Review and Negotiate Terms
3. Check for Prepayment Penalties
4. Understand the Full Cost
5. Know the Interest Type

Compare Multiple Lenders

Don’t settle for the first offer you get. Instead, look around at different lenders to compare rates and fees and ensure they have a good reputation. After all, every lender has different terms and expectations, so getting multiple quotes can help you find the most favorable terms for your investment.

Review and Negotiate Terms

It’s crucial to always read your loan agreement carefully. Also, don’t be afraid to negotiate with your lender. You may be able to lower the interest rate, adjust the repayment schedule, or reduce certain fees just by asking your lender. 

Check for Prepayment Penalties

Some lenders charge a fee if you pay off your loan early. So, if you plan to sell the property or refinance with another loan quickly, you’ll want to ensure there’s no costly penalty that could reduce your profits. 

Understand the Full Cost

Don’t get too hung up on the interest rate or down payment. Instead, look at the entire cost of the loan, including origination fees, underwriting costs, servicing fees, and more. Knowing and calculating the entire cost of the loan can help you determine your potential return on investment.

Know the Interest Type

Hard money loans may have fixed or variable interest rates. That said, you’ll want to understand how your rate is calculated and whether it can increase over time. These numbers can directly affect your monthly payments and overall loan cost. 

Get in Touch With a Maryland Lender Today

Knowing hard money do’s and don’ts can help you determine whether or not this financing option is right for you. Hard money loans are unconventional, short-term loans that are great for investors looking for quick financing. 

If you’re looking to finance a fix-and-flip project in Maryland, look no further than MHML. Maryland Hard Money Lenders can help you secure fast, efficient, and flexible financing. Learn more about our lending process or fill out our initial loan application today!