Learn How to Get a Hard Money Loan
What Exactly Is a Hard Money Loan?
Obtaining a loan from a more traditional lender, such as a huge bank, is a painfully tedious process—and investors in fast-paced businesses cannot afford to be slow. While banks have made applying for a credit card an easy online procedure, qualifying for a mortgage can still take months.
Conventional lenders look at credit ratings, borrowing history, and debt-to-income ratios as indicators of your capacity to repay your loan. These possible concerns can be avoided with hard money. In fact, hard money lenders are less concerned about your ability to repay the loan.
They are more concerned with the collateral, which they can seize and sell if they are unable to repay the loan. Hard money loans feature higher interest rates and are viewed as a short-term option between financing construction and a long-term mortgage; as a result, hard money loans are also known as swing loans or bridge loans.
How to Apply for a Hard Money Loan
Save money aside for a down payment.
The majority of hard lenders will not lend you the total cash required to fund a project. To reduce their risk, they will instead employ a formula known as loan to value (LTV). The LVT is essentially the loan-to-value ratio of the property.
The LTV is 70% if you need to borrow $700,000 to finance a $1 million apartment development. Most lenders, it turns out, don’t want to go much deeper than 70%, though they will cover at least 60%.
If you require more, they will frequently require additional collateral as security and will only provide the loan if they can place a lien on another piece of property you own. In the case of a hard money loan, you should have roughly 30% of the property covered in cash.
Whilst there are other methods for accessing that cash, one of the simplest is just to have it in the bank, built up via savings. This will increase the attraction of your project to vendors and minimize the need for them to issue liens on additional properties you own.
