Hard money lending is a type of asset-based financing. This means that the lender bases the loan approval on the value of the property being financed. You don’t have to worry too much about your credit rating, stable employment status or ability to repay the loan. The important factor is the value of the property.
Because of the short terms of the loans, these loans are sometimes called bridge loans or swing loans. Some factors that set these loans apart from conventional real estate financing are:
- Fast approval process
- Designed for the short term
- Higher interest rates
- Higher down payment required
- Borrower’s credit not important
- More flexible terms
- Receive funds quickly
Loan Approval Process
The steps that you need to take to get approved for a hard money loan in Florida are a little different than for a conventional loan. Getting hard money financing for a real estate project may be scary to someone who has never done it before, but it is a straightforward and fairly quick process.
Here are six steps that you need to take to get hard money financing:
1. Line Up Your Down Payment
Since a hard money loan does not depend on your credit rating but on the value of the property, the loan-to-value (LTV) ratio that lenders will be willing to finance is usually 70% or less. This is because, if you default on the loan, the lender will take over your property. They want to make sure that the property is worth at least the amount of the loan, in case they need to sell the property to cover the defaulted loan.
If the lender finances 70% of the purchase price, for example, then you will have to come up with a down payment of 30%. There are several ways to find this large down payment amount:
- Save up the cash to cover the down payment. This will certainly be the easiest way to make your loan application attractive to lenders.
- Use another property you own for collateral. The lender will place a lien on this property to cover the down payment.
- Borrow the down payment elsewhere. Perhaps you can borrow from family or friends, or you may be able to get a second loan on the property to cover the down payment.
- Find a private investor who is willing to put up cash for the down payment in exchange for a stake in the profits from your investment.
2. Find a Hard Money Lender
Hard money lenders are not regulated as much as banks are. Make sure that the lender you find has a good reputation. It is a good idea to search for a hard money lender before you need one so that you will be prepared to close quickly once you find a suitable property.
Here are some signs of a good lender for your projects:
- Other investors recommend them. Join a real estate investment group so that you can ask other investors who they would recommend for hard money lending.
- Their website looks professional and not like a fly-by-night operation.
- They have not been involved in any lawsuits or shady deals.
- They will meet you in person and will send someone to view and appraise the property.
- They are able to show you some successful past projects.
- They have handled the type of project you are interested in before. Some lenders specialize in certain types of projects, such as hotels or restaurants. Make sure they have experience in your investment category.
Once you have found some good candidates, you may want to meet with them and ask them some questions about their lending process even before you have a property in mind.
3. Show Your Professionalism
You will want to impress the lender with your professional attitude toward your business. When you are ready to apply for a loan, gather information about the property you want to purchase. Research the property in the real estate listing service in your area or on Zillow or Trulia. Include your business plans, blueprints, construction budgets and other pertinent information. Collect data on the neighborhood and its growth potential.
4. Submit Your Application
When you have found a property, you should be ready to submit your application. Consult with your lender ahead of time so that you have time to gather the documents you need. Unlike conventional loans that can take months to get approved, approval for these loans will only take a couple of weeks. Make sure your contractors and other staff will be ready to go once the loan is approved.
Even though your personal credit is not as important for hard money financing, you still may need to show some documentation related to your finances or employment. Be ready with this information ahead of time. Keep in touch with the lender during the application process, and be sure to be available to answer any questions they may have. The lender may be limited as to the amount of money they have available. They may decide to lend the money to whoever seems most cooperative and interested in the process.
5. Protect Your Assets
The hard money industry is not regulated in the same way that banks are. Be sure to get an attorney to review your paperwork and protect you. The lender should give you all the details of the loan, like the exact repayment schedule and amounts, terms, interest rate and fees.
Make sure to get proper insurance for your property. The lender will probably require you to have the property insured since the property is the collateral for the loan.
Don’t do any business under your own name, since that could expose you to losing all the assets you own if something goes wrong. Instead, see a lawyer and set up a business such as an LLC or S-corporation. That way, your business assets will be separated from your personal assets.
Plan ahead for loan expenses such as closing costs, appraisals and fees. You don’t want to be caught short of cash at a crucial time. You will probably have initial expenses connected to the property you are purchasing, too. A good financial plan is essential.
6. Make a Plan for Repayment
Hard money financing is designed to have short loan terms. Most of these loan terms are for one year, although occasionally terms can be as long as five years. Make sure you have a plan for how you will repay the loan when its term ends. If you plan to flip the property, you will need to have the property sold by the time the loan ends. Otherwise, you will have to get a long-term loan lined up for when the hard money loan ends. If all else fails, you might need to get another bridge loan after the first one ends.
Advantages of Hard Money or Bridge Loans
You might wonder why someone would want to take out this type of loan. Here are some of the advantages:
- You can close deals quickly. The short approval process means that you can take advantage of a great real estate deal before it’s too late. After you have some experience with a certain lender, your next project may be approved even more quickly.
- Hard money lenders are more flexible. They can work with you on loan terms and rules for the loan. The requirements are not as stringent as they are with a bank offering conventional loans.
- They work great for real estate flipping or developing a real estate project to sell. The short-term nature of these projects makes them ideal for financing with hard money.
Disadvantages of Hard Money Financing
There are also some disadvantages of this type of financing. It is not necessarily right for every type of project or investor. Here are some of the disadvantages:
- The interest rates are higher than with conventional loans. However, this is not so bad if you only need financing for a short time and take an interest-only loan.
- The short term of the loan is a disadvantage if you need longer-term financing. It means that you have to look for another loan quickly. Still, the hard money financing will help tide you over until you find a longer-term loan.
- Since the hard money financial sector is not as regulated, you have to do your due diligence and make sure you find a reputable lender to deal with.
For many real estate investors in Florida, the advantages of hard money financing outweigh the disadvantages. These loans can help you to pursue real estate projects that would otherwise be out of your reach. Once you understand the process, you may find that hard money lenders can be easier to work with than a bank would be.
Call Us to Find Out More
HML Solutions is experienced in hard money lending. We are ready to discuss your real estate projects with you whenever you are ready. Call us today to find out more about what types of financing we can offer that will fit your needs. Our loan specialists will be glad to answer any questions that you may have.