They say time is money. Are you feeling analysis paralysis from seeking out an adequate money lender? Determining the right kind of funding method for an investment property is no easy feat. At the end of the day, hard money lending is a beneficial tool—a tool that’s filling a current financing void in the property development marketplace. Real estate investors often lean on these private lenders to acquire properties because of the private lenders’ benefits over traditional loaners.
Speed, simplicity, and flexibility are significant overarching advantages, but there are notable deliberations about private loans to make before you sign on the dotted line. For your consideration, here are the top questions to ask prospective hard money lenders.
Which Types of Funding Does the Lender Offer?
Real estate funding tends to fall under a wide array of categories. A good hard money lender specializes in different loans categorized by the type of construction or development project. Lenders often model their terms and interest rates on the basis of a specific real estate project, such as a rehab or a commercial property. Ensuring you find and receive the correct financing for your project will provide greater flexibility and conditions.
How Much Money Can You Borrow?
Out of all the top questions to ask prospective hard money lenders, inquiring about minimum and maximum loan sizes up front is a must. Each lender will set a straightforward amount based upon numerous factors, such as the LTC (loan-to-cost), LTV (loan-to-value), and APR (after-repair value) of the property. Since hard money loans are based on the property as collateral, lenders will look directly at the overall value or total cost to determine the limits of how much they’re ready to fund.
What’s the Down Payment?
Cross-examining fees are common sense, but up-front and hidden fees are quintessential topics to touch on. A variety of fee determinants are at play, depending on if you’re utilizing a broker and on the partnership between the broker and the private lender.
First and foremost, do inquire about up-front costs such as appraisals, document fees, taxes, and lender or third-party fees. Also, ask about potential penalty fees if the loan were to go to past term. Next comes the amount of the down payment to secure the deal. The lender’s LTC is the typical maximum they fund, meaning you’ll need to come up with the rest of the project money. Consider all these costs as determination elements of lender analysis.
What Are the Interest Rates and Repayment Terms?
Last but certainly not least, query about the specifications of interest rate charges and repayment terms over a time period. Hard money lenders tend to have slightly higher interest rates due to add-on risk, but the flexibility of their terms and conditions is second to none.
Ask if interest calculations occur on a daily basis or over a selective time frame. Since the frequency of repayment influences your capital and cash flow, be certain in your decision. You should only sign on the dotted line if this financing deal is in everyone’s best interest.
