How to Avoid 5 Common Hard Money Loan Mistakes
There are plenty of reasons to use hard money loans. Whether you don’t meet the qualifications for a traditional loan or need access to capital faster, hard money loans are a great choice. After all, it provides a creative, effective financing option for investors who want to expand their portfolios quickly. However, while the process is quite simple, there are a few things to consider. Read along as we discuss common hard money loan mistakes and how to avoid them.
Contents of This Article:
- How Do You Get a Hard Money Loan?
- Are Hard Money Loans Safe?
- 5 Common Hard Money Loan Mistakes to Avoid
- Simplify the Process With Professional Lenders
How Do You Get a Hard Money Loan?
Getting a hard money loan isn’t very difficult, although it depends on the company or individual you’re getting it from. Generally, the requirements for hard money loans aren’t as strict as they would be for a conventional mortgage loan through a bank. With that, the approval process is also much quicker, allowing investors to finance properties faster.
The process varies depending on who’s funding the loan. However, the requirements and application process are generally the same. Here are some of the steps you’ll need to follow if you’re looking to get a hard money loan.
- Have Your Down Payment Ready- Hard money loans typically require larger down payments than traditional mortgage loans. So, you’ll want to be prepared with the right amount of money before applying for a loan.
- Find a Reputable Lender- Finding the right lender for your goals is key. Research thoroughly to find someone with good reviews and experience lending on your type of investment property.
- Choose a Property Wisely- The main thing your hard money lender cares about is the value of the property you need to finance. After all, this is used as collateral and is a primary factor in whether or not they approve the loan.
- Apply for the Loan– Know what documentation you’ll need to complete the application process. Once you’ve provided all the right information, you can have your Maryland real estate loan funded in just a few days.
- Create a Plan to Repay It– Most hard money loans have short repayment terms, usually around one to three years. As such, you’ll need to have a solid, practical plan to repay the loan by the end of the term.
Are Hard Money Loans Safe?
Yes, hard money loans are safe. However, they also come with some risks that require careful consideration from investors who use them. Like with any loan, hard money loans come with some pros and cons. For instance, they’re best for experienced investors familiar with short-term financing and with a solid exit strategy in mind. After all, if you can’t repay the loan, you’ll likely lose the property that you needed financing for.
Additionally, you’ll want to find a credible lender who won’t impose hidden fees or scams. Hard money loans come with much higher interest rates and fees than traditional ones, which can be a shock if you’re unfamiliar with them. This can also make them more expensive if you cannot repay them quickly.
To make hard money loans safer, you’ll want to thoroughly research your lender’s reputation and reviews and read through your contract carefully. Don’t be afraid to ask any questions you may have about the terms or conditions. Next, we’ll review some common hard money loan mistakes you’ll want to avoid.
5 Common Hard Money Loan Mistakes to Avoid
Hard money loan mistakes happen all the time. Whether you’re an inexperienced borrower or don’t have a clear exit strategy, there are several things you’ll want to avoid as an investor. Here are some common mistakes to watch for while applying for a hard money loan.
- Not Knowing How Much Money You Need
- Brushing Off the Terms and Conditions
- Not Having the Right Documentation Ready
- Having a Poor Credit Score
- Applying for a Loan Without an Exit Strategy
Not Knowing How Much Money You Need
One of the most common hard money loan mistakes is not knowing how much money you need to borrow. It’s crucial to have a realistic idea of how much you need without over-valuing the property. For instance, some borrowers may overestimate the property’s value, making it more difficult to repay the loan at the end of the term. So, before applying for a hard money loan, research and learn the property’s actual worth.
Brushing Off the Terms and Conditions
It’s crucial to thoroughly read through the terms and conditions of your hard money loan. Before applying, know that hard money lenders charge higher interest rates and set shorter repayment terms. With that, it can be challenging to repay the entire balance when the loan is up. To avoid this mistake, read the terms and conditions carefully so you know exactly what you have to pay and when you’re expected to pay the loan off completely.
Not Having the Right Documentation Ready
Before applying for a hard money loan, having the right documentation on hand is important, as it can make the process a lot faster. So, once you get pre-approved for your initial loan application, you’ll want to gather your documentation.
If you’re working with Maryland Hard Money Lenders, here’s what you’ll need.
- Tax returns (2 years)
- Copy of sales contract and deposit checks
- Driver’s license
- Bank statement showing how much money you have
- Personal financial statement
- Detailed list of repairs and schedules, including material and labor costs
- Copies of contractor estimates or contracts
- Appraisal or inspection reports of the property
- Addresses of any cross-collateral properties
Having a Poor Credit Score
Most hard money lenders aren’t looking for a perfect credit score. In fact, you’re typically able to get away with a lower score than you’d need for a traditional mortgage loan. However, you should be able to prove that you’re financially responsible and able to repay your hard money loan. Usually, lenders look for a score of at least 650 or higher. So, if your score is lower than that, you should work to increase it before applying for a hard money loan.
Applying for a Loan Without an Exit Strategy
Another one of the most common hard money loan mistakes is not having a realistic exit strategy. Without one, lenders will likely hesitate to fund your loan, and some wouldn’t even consider it. Most investors use hard money loans for fix-and-flip projects or new construction builds, and they can pay them off once the project is done. However, if you don’t have a plan for your investment and you’re unsure of how you’ll repay the loan, it likely won’t work out. Most lenders require a strong and realistic exit strategy before funding your loan.
Simplify the Process With Professional Lenders
Knowing common hard money loan mistakes and how to avoid them can help you get your investment funded faster. Just remember to save for a down payment, have your documentation ready, and prepare a realistic exit strategy for your property. Then, our Maryland Hard Money Lenders can fund your investment with confidence.
Our team of real estate lending professionals can help you finance your property quickly and efficiently. Just fill out our simple loan application, and we’ll get in touch with you as soon as possible. Want more information about our lending process? Contact MHML today!
