Understanding Legal Aspects of Hard Money Lending
Hard money loans can be an excellent tool for investors who want to grow their portfolios, especially those who may not qualify for traditional mortgage loans. However, since these loans come from private lenders rather than banks, they may be subject to different rules and regulations. It’s important for both borrowers and lenders to understand the legal aspects of hard money lending. Today, we’re reviewing how hard money works, key legal considerations, and hard money lenders’ requirements.
Contents of This Article:
- What Is Hard Money Lending?
- How Does Hard Money Lending Work?
- Legal Aspects of Hard Money Lending
- General Requirements for Hard Money Lenders
- Find a Reliable Lender for Your Investment
What Is Hard Money Lending?
Hard money lending is a type of asset-based financing that allows borrowers to secure short-term loans using real estate as collateral. Unlike traditional loans, which are mostly based on a borrower’s credit score and income, hard money loans are primarily approved based on the value of the property being financed. They’re generally provided by private lenders or companies, making them more flexible but more expensive than conventional loans.
Types of Hard Money Loans
You can use hard money loans for several different real estate investments. Some of the most common types of hard money loans for investors include the following:
- Fix-and-Flip Loans- Used by investors to buy, renovate, and sell properties quickly for profit.
- Bridge Loans- Short-term financing that helps investors transition between properties or secure a more permanent loan.
- Rental Property Loans- Hard money loans that allow investors to quickly purchase rental properties before refinancing with a traditional mortgage.
- Construction Loans- These are used to finance new construction projects when traditional lenders are hesitant to approve funding.
- Cash-Out Refinance Loans- Allows property owners to tap into their real estate equity to finance new investments or renovations.
How Does Hard Money Lending Work?
Hard money lending is different from other types of lending, as it has different criteria and generally caters to specific investments. For instance, lenders base their approval and loan amounts on the value of the property being used as collateral. So, if the property has potential and proves to be a sound investment, they’re more likely to approve a loan. Generally, they’ll lend anywhere from 60 to 80 percent of the property’s after-repair value (ARV).
Also, hard money loans are short-term, ranging from 6 months to three years. With that, they have higher interest rates than traditional mortgage loans, sometimes up to 15%. However, since they’re not heavily reliant on a borrower’s credit or financial history, they can be approved and funded within just a matter of days instead of weeks or months.
Legal Aspects of Hard Money Lending
Hard money lending can be extremely profitable, so long as you’re following the necessary laws and regulations that apply to you. Here are some of the most important legal aspects of hard money lending.
- Licensing and Regulations
- Usury Laws
- Transparent Loan Agreements
- Due Diligence
- Collateral and Foreclosure
Licensing and Regulations
Hard money lenders must comply with state and federal lending laws. Most states require some type of licensing to become a hard money lender. However, licensing standards vary from state to state and generally pertain to interest rates, loan duration, and disclosure laws.
Usury Laws
Usury laws set maximum interest rates that lenders can charge for hard money loans. So, even though hard money loans typically have higher interest rates than traditional loans, they must still comply with state-imposed limits to avoid predatory lending.
Transparent Loan Agreements
Although they may come from private lenders or companies, it’s crucial that hard money loan agreements are fair and transparent. The terms of the agreement should be described in detail, including the loan amount, interest rate, repayment terms, and any fees charged by the lender.
Due Diligence
While they can be a quick and efficient way to obtain capital, it’s crucial for both borrowers and lenders to do their research before closing a loan deal. Both parties should conduct their due diligence and evaluate the property, loan terms, and potential risks before finalizing an agreement.
Collateral and Foreclosure
Unlike other loans, hard money loans are backed by real estate. This means that the lender can take control of the property if the borrower fails to repay the loan. However, the foreclosure process is usually governed by state laws that regulate the procedure. As such, both parties must know and understand these laws before signing an agreement.
General Requirements for Hard Money Lenders
Hard money lenders generally have different requirements compared to traditional mortgage loans. That said, here are some of the things hard money lenders look for when funding a loan.
- Borrower Qualifications- Although lenders focus primarily on the property’s value, borrowers should still meet other qualifications. For instance, they usually need a decent down payment, a clear exit strategy, and at least some real estate experience.
- Property Requirements- Lenders may have certain requirements for the properties used as collateral. For instance, lenders usually look for a residential or commercial property that has the potential to be fixed and sold for profit.
- Loan Terms and Rates- Hard money loan rates and terms are based on factors like the lender’s experience and other criteria. Additionally, typical terms for hard money loans include interest rates ranging from 8 to 15 percent, an LTV ratio of around 60 to 80 percent, and short repayment terms ranging from 6 months to 3 years.
Find a Reliable Lender for Your Investment
Understanding the legal aspects of hard money lending is beneficial for both lenders and borrowers. Whether you’re an aspiring hard money lender or you’re a borrower looking to get a hard money loan, you’ll want to do careful research to decide whether or not it’s right for you.
If you’re looking for a reliable hard money lender for a Baltimore property, look no further than Maryland Hard Money Lenders. Our team of lending professionals can help you get the capital you need quickly and efficiently. Learn more about our lending process or fill out our initial loan application today!
