Hard money loans are used by real estate investors and developers who want to scale their businesses. Unfortunately, some lending companies use aggressive tactics and unfair terms, so beginner investors are often scared to take out a loan. Today, we’ll discuss the characteristics of quality hard money lenders, so you can avoid predatory companies and find the best options in your area.
Characteristics of Quality Hard Money Lenders
Fixing and flipping houses can be extremely lucrative. Investors often make a 10-20% profit within six to twelve months. However, many beginners don’t have the money to purchase a house or apartment block outright. They need a loan tailored to their circumstances, and private companies, not banks, usually issue hard money loans.
They are easier to obtain than mortgages, but there is some risk involved because not all lending companies have investors’ best interests at heart. The best companies have first-hand real estate experience, a good reputation, and flexible options for borrowers. They are willing to communicate and negotiate, and they offer competitive interest rates.
Flexible Options
Every property deal is unique, and there isn’t a one-size-fits-all solution that works for every investor. That’s why quality lenders offer a wide range of loan options. At Turning Point Lending, we provide financing for fix and flip deals as well as new property developments. Our traditional program is suitable for investors who are flipping a building with one to four units. We can provide up to $2 million per deal, and our interest rates start at 10.75%.
Those who already know that their project will only take a few months can take part in our 5-Month Disposition Program. The interest rates are even lower, and we can finance up to 90% of the purchase as well as 100% of the rehab costs. New investors and those with limited funds might benefit from our Deferred Interest Program. This is slightly more expensive, but no interest has to be paid until the deal is complete.
Willing to Communicate
Never work with a lender who is bad at communicating. The last thing you need is for your deal to fall through at the last minute because your lender was unresponsive or didn’t disclose important information. Before you sign anything, make sure you fully understand the terms of your loan. If anything is unclear, ask your lending company for clarification.
It’s easy to tell whether a lender is a good communicator. Pay close attention to how they handle your request. Do they respond right away? Are support staff always friendly and helpful? If the answer to either of these questions is “no,” don’t hesitate to move on to a different lending company.
First-Hand Real Estate Experience
Someone who has never successfully completed a real estate deal might not understand the needs of investors. That’s why it’s always best to work with people who have first-hand experience in the property industry. The founders of Turning Point Lending both have rental portfolios, and they have flipped properties in the past. They have an excellent understanding of the kinds of loans short-term investors need.
A Good Reputation
One of the best ways to find out more about hard money lenders is to speak to people who have worked with them. Customer reviews can be a good starting point. Do an online search to find out whether the company you’re considering has positive reviews. If you can’t find a lot of information, ask the lenders to provide you with the contact information of one or two of their partners.
Speak to the firm’s customers about their experience so far. Has the lender met their expectation? Would they use them again? What was communication like? If the investors are happy with the service they received, you will likely have a good experience, too.
Competitive Interest Rates
Hard money loans are more expensive than mortgages because the term is much shorter. However, the interest rate shouldn’t be predatory. At Turning Point Lending, our rates start at 10%. This is very competitive since the average hard money loan costs 11-13%.
It’s important to note that not every investor will benefit from the best possible rate. We consider various factors before making an offer. The most important considerations are the quality of the property, the borrower’s credit score, and their previous real estate experience. Someone who has already completed several deals and has an excellent credit score is likely to get a better offer than a beginner with a below-average credit rating.
How Does a Hard Money Loan Differ from a Mortgage?
A traditional mortgage is designed for people who want to keep their homes for several decades. Most mortgages have terms of at least 15 years. This makes them unsuitable for people who want to flip properties within six to twelve months. Hard money loans are better for these investors because they are more easily accessible, their terms are more flexible, and they are specifically designed for the short term.
The eligibility criteria are also different. Mortgage lenders require a lot of documentation and do a thorough background check to determine whether the individual is creditworthy. Lenders offering hard money loans are less strict because they don’t take on much risk. Every loan is backed by the property that is being renovated or constructed. If the borrower doesn’t pay back the loan, the lender has the right to foreclose and sell the property.
Who Can Get a Hard Money Loan?
Most people can get a hard money loan, even those who don’t have an excellent credit score and years of experience in the property industry. Lenders typically check applicants’ credit ratings, but they might accept people even if their score is under 600.
How Much Money Can I Get?
Quality lenders don’t usually offer 100% financing. Most of our loans at Turning Point Lending cover either 80% or 90% of the property’s value and 100% of the rehab costs. A new construction loan covers 70% of the ARV. Before you apply, check that you have enough money for a down payment on the place you’re flipping. If not, you need to either wait and save up some cash or get another loan to cover the down payment.
Why Use a Hard Money Loan?
Most hard money loans cost between 10% and 18% per year. If you have enough cash to purchase a property outright, you might wonder whether it would be cheaper to avoid taking on debt. This isn’t usually the case because a loan helps you to leverage your resources, scale your business, and earn more money.
When you use financing, you can either buy a bigger place or several units. This means that you’ll make a bigger profit in the same amount of time. At first, you might spend a lot on interest, especially if your credit score is low. But when you work with the same lender for many years, you build up a relationship and gain access to the best deals, so your expenses become smaller and your profits soar.
Quality hard money lenders have a good reputation in their industry, flexible options for borrowers, and competitive interest rates. They offer a wide range of loans that are suitable for both beginners and advanced investors or developers. Contact us at Turning Point Lending to find out more about our loan programs. We have first-hand property flipping experience, so we understand the unique needs of short-term investors.