As a real estate investor, you know the importance of funding your projects. Without funds, you cannot purchase those sweet deals that will make you substantial money and increase cash flow.
While there are many lenders in the industry, those offering hard money loans are often the most sought after by real estate investors. If you have never applied for this type of loan, you may feel intimidated.
We are here to help you understand the right questions to ask hard money lenders. Getting answers to these questions will guarantee you are prepared to take action and get the financing you need right away.
Should You Choose a Hard Money Lender?
You could go the traditional route and seek a bank loan, but is this the best choice for your real estate investment needs? Do you have around 30 days to wait for approval?
If you answered no to the above question, you might want to consider other options, including a hard money loan. With this loan, you can get approved quickly and may receive your money within ten days.
Because the property serves as collateral, some hard money lenders will even offer loans to those with a bad credit history or shaky payment histories. Hard money lenders are more concerned with the profit potential of a property than your creditworthiness.
What Should You Look For in a Lender?
Research is essential when it comes to choosing a hard money lender. Vetting private money lenders allows you to choose carefully. At the very least, you should check with the Better Business Bureau to ensure the lender does not have a poor reputation.
Once you have narrowed down your choices in lenders, you need to sit down with each one and talk about why you believe the property has great potential. Asking the right questions allows you to dig deeper and find the perfect lender for your real estate investment needs.
EXAMPLE LOAN SCENARIOS
Questions You Should Ask Hard Money Lenders
It’s easy to forget what you want to inquire about during a loan application. If you’ve never been through the loan process, you may be nervous and forget to mention the right questions.
We have created an extensive list of questions for you to ask potential lenders. These questions should help you better understand what kind of lender you are dealing with and if they are worth your time.
What Size Loans Do You Offer?
You need to know the typical loan size the private lender handles. Knowing the average and maximum amounts will help you decide if this lender is right for you.
Knowing the types of loans, loan amounts, and loan terms offered by the lender is highly beneficial. Do they offer bridge loans, conventional, or construction loans for commercial property?
Find out as much as possible about the available loans for your specific property type from institutional lenders.
How Long Is the Available Term for Hard Money Loans?
You need to know the loan term offered by the hard money lender. Although hard money loans are short-term, the actual term length varies greatly among hard money lending companies and may be based on how they calculate LTV (loan-to-value ratio). Asking for this information up front will help you determine if the lender offers what you need.
Do You Fund Rehabs? How Is the Money Dispersed?
Most lenders fund the after-repair value for a real estate project, while other lending companies pay for 100% of renovations. You need to know the process for rehabbing value money disbursement to be prepared.
What Are the Interest Rates?
If you have any hard money experience, you already know the interest rates will be higher than traditional lenders.
Some lending companies are willing to negotiate the interest rate for real estate investments and construction loans. It never hurts to find out if the interest rate and interest payments are flexible.
What Are the Down Payment Requirements?
When seeking this type of loan, you need to know about the down payment requirements. Depending on the hard money lender, you will likely have to put in some of your own money.
The average is around 25 to 30% for residential properties and up to 40% for commercial properties. This percentage varies among private lenders.
Are You a Direct Lender or a Broker?
As a borrower, you need to know if you are dealing with a direct lender or if they will broker your loan to another hard money lender. The more you learn about the company and its practices, the better equipped you will be to decide.
Ideally, you should seek a hard money lender that will consider the after-repair value instead of the current value. Ask the right questions to get the answers you need.
Is There a Penalty for Late Payments or Prepayment?
You should make every effort possible to avoid late payments and understand the lender’s loan terms. That being said, life happens.
Knowing about late penalties on monthly payments will help you avoid surprises if you are a little late on a payment.
Some direct lenders also charge borrowers a prepayment penalty. This penalty gets charged when a borrower pays off their loan early.
In most cases, a prepayment penalty will not affect the borrower. If the hard money lender does have this penalty, you should make sure it will work with your property timeline.
Do You Charge an Origination Fee?
The origination fee is the fee charged by the hard money lender in exchange for the work they put into processing the loan and is not the same as a loan application fee. Not all lending companies charge origination fees. Ask lending companies this question, and take note of their answers. Another way to present this question is “how many points do you charge?”
What Is the Time to Closing?
You need to know the answer to this question before choosing any hard money lender or other lenders. As a real estate investor, you need funds as soon as possible, or the next investor will snatch up your perfect deal.
Many hard money lenders can close in around ten days or less, but the time frame varies. Although a private money lender may not be able to give you an exact timeframe, they should be able to give you enough information to help you know what to expect.
The appraisal of the property is one of the last steps in the process of getting a hard money loan from a potential lender. Once the hard money lending company conducts the appraisal, the funding process should move quickly.
Knowing this information will help you prepare and know when to expect your loan to be funded.
Will You Give Me a Pre-Approval Letter?
Presenting a pre-approval letter from a lender allows you to have a greater chance of getting your offer approved by the seller. Once you submit your application, the lender should be able to determine if you qualify.
Make sure your private money lender drafts a pre-approval letter showing you have financial backing for the property purchase. Most private money lending companies should have no problem offering this to borrowers.
MORE EXAMPLE LOAN SCENARIOS
Do You Have References From Other Borrowers?
Another question you should ask a hard money lender is if they are willing to provide references or testimonials from previous borrowers.
Any lender, including smaller lenders, should be willing to pass on this information to potential borrowers.
You should also do your research into lender reviews before deciding. Make sure you fully understand the total cost of the entire loan, including processing fees, the purchase price, prepayment penalties, and other fees that may be hidden inside the loan.
Get Started Today for Pre-Approval on a Hard Money Loan
We are poised to answer all your hard money loan inquiries and help you determine if this loan is right for you. We understand the process can be stressful, especially if you’re unsure about your income ratio and borrowing history.
Get started right away and ask a hard money professional about your ability to obtain this loan. They will help you through the straightforward application and approval process.