If you are looking to purchase a property but do not want to pay upfront, a hard money loan might be good for you. Now, if you are planning to obtain a loan from a hard money lender, it’s essential to ask compelling questions before you apply for the loan. Below is a list of “Must-Ask” questions you must ask your lender when taking out a hard money loan.
Questions to Ask Before Investing in Hard Money Loans
Before committing to a hard money loan, it’s crucial to ask your lender important questions, which will help you assess the loan’s viability, understand the repayment terms, and mitigate potential risks. Here are some important questions you must ask your lender before investing in hard money loans.
Ask If He Is a Direct Lender or A Middleman
You mustn’t make the mistake of thinking all hard money lenders are direct money lenders. Not all are; some outsource the loan funding to other financing companies while keeping a margin of profit for themselves.
A direct money lender will process the loan application by funding it with his internal resources. In contrast, a lender who works as a middleman will send your proposal to loan companies to help find you a hard money loan.
Your money lender should be a direct lender instead of a middleman, as it is much smoother and easier. If there are challenges down the line, you can be sure your lender will take full responsibility. But if he’s only acting as the middle guy, he will shift all the blame to the company that provided the loan. You also won’t know the actual value of your loan since he will add his profit margin.
Years of Experience
Inquiring about your lender’s experience level in the industry is essential. If they have less than two years of experience, it may be prudent to reassess whether they fit your needs.
This is because inexperienced individuals may rely on untested approaches, which can put your investment at risk. To ensure your financial security, scrutinize a lender’s credentials by inquiring about their tenure in the industry, their portfolio of borrowers, and the scale of projects they typically fund. This due diligence will help you avoid pitfalls and secure a reliable partnership.
Appropriate State Licenses
Not all individuals with capital can engage in hard money lending, as it is subject to stringent regulations. Each state has unique laws and guidelines governing hard money lenders. Therefore, ensuring your lender fully complies with the specific regulations in the state where they operate is essential and provides you with a secure and legitimate loan arrangement.
Licenses can be displayed on lender’s business cards, financial IDs, brochures, or physical space. The license should also show any disciplinary action and sanctions against the licensee. That way, you can know if he has defaulted on any hard money lending options with his previous customers.
If it is not available in any of these places, ask questions about it and confirm that the lender is a licensed money lender. If your money lender is making excuses about not having them, it might be time to find a new lender.
Loan-to-Value Ratio
The loan-to-value ratio, also known as the LTV ratio, represents the percentage of your property’s current value that you can borrow. It’s the proportion of the property’s value that the lender is willing to loan you. There is no uniform LTV for any property, as the valuation is based on many factors.
The LTV value varies from one lender to another and from one property to another. This LTV ratio determines the actual value of the loan between you and your equity based lender. It also dictates the interest rates and repayment policies.
Interest Rates
Interest rates differ by person and region and can also be influenced by the risk associated with the project. Despite this, monthly payments are often interest-based, and you’ll only pay off the principal balance at the end of the loan term.
Generally, borrowers can expect a rate ranging from 9-13% on these loans and points ranging from 1-4% of the loan amount. You should also inquire about how they calculate interest. For example, is it calculated daily or over a different period? Speak with different lenders to get an idea of the different interest charges. It will also help you to make a good call.
Collateral
Hard money lenders lend loans that are secured against your property. The value of your property or real estate project is the collateral you must provide in return for the loan. Money lenders take into account the total cost of the project and the worth of the finished development.
Work with a lender who can provide you with an estimated value or appraisal for the collateral you need to provide. This should also be based on how much you want to borrow.
Prepayment Penalty
It’s not shocking to hear that some lenders have a prepayment penalty for hard money loans. Why is that done, you may ask? If you prepay your loan much earlier than the said date, your lender will lose some funds. This is because he won’t be getting a handsome return on investment for months that have been laid down. Thus, he’ll ask you to pay a prepayment penalty.
While this is not the case with all lenders, be sure to know this well in advance. If it has already been discussed, your lender knows he can charge you an excessive penalty fee, and you’d do nothing about it. So, rule out future problems by clearly understanding the loan’s terms and conditions.
Up-Front Fees
A crucial area to question is up-front fees. Hard money loans often involve a large amount of money, and there can be some fees the lender can charge when you produce documents for documentation.
While standard fees like insurance, notary, escrow, and recording fees are customary, you might need to think twice before giving in to a hard money lender who demands a special or hidden fee.
References
Similar to checking a product’s reviews before buying it, you should also ask the lender if they have any references. While many hard money lenders have no references due to confidentiality agreements, it is still worth asking.
A good lender will be happy to show you references or testimonials from previous borrowers. Ensure you do an exhaustive background check on their references to confirm authenticity.
If the lender is sincere and genuine, he’ll brag about the good words offered by his previous customers. So, don’t hesitate to ask.
Time to Close
Hard money lenders understand the urgency of real estate deals and have streamlined their processes to provide quick approvals and funding. This enables investors to secure properties before competitors, meet tight project timelines, and take advantage of time-sensitive opportunities.
Hard money loans typically close within 1-2 weeks for simple transactions and 2-4 weeks for more complex deals. It is essential to request your lender’s timeline to ensure a prompt and efficient transaction. By doing so, you can effectively plan and execute your strategy confidently, minimizing delays and maximizing opportunities.
Time to Pay off The Loan
Hard money loans are provisional loans that are supposed to be paid off quickly. In many cases, the loan period ranges from 12 to 24 months. However, other hard money lenders may offer longer terms, as long as five years.
Down Payment
While many hard money lenders are willing to finance a significant portion of your project, some may not be willing to cover the entire cost. They want to ensure that you have a vested interest in the project’s success and are willing to share some risks. This is where the down payment comes in. The amount you’ll need to put down will depend mainly on your financial capacity and the lender.
Some lenders may require a bigger down payment if they deem the project high-risk, while others may be more flexible. Your credit score, income, and experience in the industry can also impact the amount you’ll need to put down.
Generally, you can expect to pay anywhere from 10% to 30% of the project cost as a down payment. It’s essential to factor this into your budget and discuss your financing options with your lender to ensure you’re comfortable with the terms.
Reach Out to Capital Max
We are enthusiastic about answering all your questions at Capital Max so you can decide if we are the right fit to fund your hard money loan. We can also provide testimonials so you can hear what it’s like to work with us from other people’s perspectives.
We also offer flexible and competitive loan options. Contact us today to discuss your next loan for your real estate project.