Private and hard money loans are critical funding options for real estate investors, but there are hazards worth mentioning. We want you to be aware of the dangers so you can make an informed decision on your loan needs.
If you need to finalize a deal quickly, funding can’t wait. What happens if traditional financing denies your loan? Another investor could put in an offer and purchase the property before you can. With a hard money loan, you will not have to wait weeks to see if you get approved for funding like you would with traditional financing.
Hard money loans are not for everyone. Although they are highly beneficial for many real estate investors, there are risks involved. We want you to be aware of the dangers associated with hard money lending, so you can take action to protect yourself as you proceed in the process.
Beware of Scammers
Regrettably, scammers abound in the hard money industry. Outright scammers exist on every real estate investment group and page. Their goal is to prey on new investors.
Often, these scammers are not even lenders at all; they are just pretending. These scammers will take your money and run. They may promise to give you a hard money loan but will first request money for fees. You will find these scammers are not transparent in their approaches.
Watch Out for Predatory Lenders
Predatory lenders, as they are often called in the industry, will do everything possible to get your money. They are genuine lenders, but they may try to take your money without delivering on their promises.
Unfortunately, because hard money loans are not federally regulated, some unscrupulous lenders take advantage of borrowers. There is always a bad apple in the bunch.
These lenders will draw up hard money loan terms they know the borrower cannot meet. They will also add clauses into the hard money loan framework. These lenders prey on new real estate investors who may not understand the process or what they are getting themselves into.
How Can You Protect Yourself During the Hard Money Loan Process?
Now that you know about some of the risks of hard money lending, you may be wondering how you can protect yourself. What can you look for to determine if you are dealing with a scammer or an unscrupulous lender?
Lenders Will Never Seek Borrowers on Facebook
Reputable private investors typically have plenty of borrowers waiting for loans. They do not need to hunt you down on Facebook and other social media sites. If a lender contacts you on social media, this should be a giant red flag.
Unfortunately, many borrowers fall for scams when fraudsters respond to their posts on social media. If you are approached, it would be best to avoid interacting with the scammer or lender.
Be Careful With Offers That Seem too Good to Be True
If a lender is offering terms that are better than any other lender and way outside the norms, you should be wary. A typical hard money interest rate ranges from 8% to 15%.
When a lender offers terms that are unheard of, be careful. You should make sure you know the realistic rates and terms you can expect before searching for a lender. If it seems too good to be true, it likely is!
Scrutinize the Lender’s Website
Check the lender’s website carefully. Is it professional? Is it littered with grammar errors and misspelled words? If you notice these issues, this is a lender or private investor you need to avoid.
Hard money lenders should have a professional website that is easy to navigate. When checking the website, make sure there is information about the company and how they approach hard money loans and private loans.
Always Ask Hard Money Lenders for Referrals
Some people may think this is an outdated practice, but we highly recommend you ask for referrals from lenders before you borrow money. A reputable lender will have no problem offering this information.
If the lender cannot produce any referrals, you should also consider this a red flag. You should be very cautious when working with lenders that have no one to vouch for them.
Check the Lender’s Foreclosures
You should be wary of any lender that has many foreclosures. Often, this means the lender is not helpful to their borrowers and is quick to take action when a borrower is late on their payments.
You can learn about the lender’s foreclosures by checking the records at the county courthouse. Do not neglect to search for this information with each new lender.
EXAMPLE LOAN SCENARIOS
Avoid Impossible Loan Terms
Before choosing a lender and seeking a hard money loan, you should do your research. You need to know the common terms and know when the terms of a loan are simply impossible. You should protect yourself in the following ways regarding the terms of your loan.
1. Know Your Repayment Ability
Before seeking a hard money loan, you need to be realistic about your repayment ability. Many real estate investors, especially new ones, take on loans they cannot afford.
Make sure your finances are in order. Ensure you can pay your monthly payments, or you could end up losing your property.
2. Always Check for Hidden Costs
When dealing with a hard money lender, transparency is critical. Interest rates are not the only cost you will incur. There could be late fees, doc fees, administration fees, and more.
These fees can add up quickly. The snowballing fees could cause you to get in over your head with your loan repayment.
3. Watch Out for Balloon Payments
Before you agree to a loan, make sure you are aware of the balloon payment, when it will come due, and how much you will pay. Remember that these balloon payments can seem to come up quickly because of the short terms of the loan.
4. Check to Ensure the Terms Have Not Changed
Sometimes, lenders will change the terms even after the paperwork has been signed. Always compare the current terms to those you signed in your loan documents, including interest rates. Keep a copy of your loan documents easily accessible.
Understand Your Loan Documents (Read Them Carefully)
Most hard money lenders are much more personable and helpful when answering questions about real estate investment loans. Because there is a lack of regulation, loan documents may vary significantly among lenders.
It is important to understand that private lenders will typically foreclose much faster than banks. You could risk the loss of your property with a single missed payment. Make sure you understand the foreclosure process before signing.
Each lender has its own requirements. You may find more responsibilities than simply making your payments on time. It is important to note that you can go into foreclosure if you default on non-monetary obligations.
Borrowers unaware of their legal rights are easier to take advantage of by lenders. Knowing both your state and federal rights will help you avoid being unfairly pushed into foreclosure.
Research Your Hard Money Lender Options Carefully
One of the most important things you can do before seeking private investors is to make sure you research carefully. Learn as much as possible about your options and choose the very best available.
Studying your lending options will help you get ahead of the game. An informed borrower is less likely to become the victim of a scammer or an unscrupulous lender.
MORE EXAMPLE LOAN SCENARIOS
Get Fast Hard Money Loan Pre-Approval
Working with the right private lender is essential for hard money loans. When working with the right partner, you can rest assured you will be treated fairly from the start.
Our partners are transparent from the very beginning. We are here to answer your questions and help you understand how to get the funding you need.
Whether you are new to real estate investing or an old pro, our partners provide lightning-fast pre-approval and funding. You will not find another nationwide lender who takes the time that they do to work with you and help you succeed.
Contact our partners to get started on the process. We will be happy to guide you and help you understand the process.
A hard money loan may be just what you need for your real estate investment endeavors. Find out about your options today so you can get started right away.