Hard money lenders, also known as private money lenders, offer investors and individuals special financing options for property development. Unlike traditional lenders, they don’t concern themselves with credit scores or take 45 days to decide.
Doing business with a hard money lender means finishing your project on schedule as you’ll receive upfront funding for your acquisition, renovation, or construction. However, finding the right hard money lender can be tricky as the market is replete with questionable individuals. In this article, we’ll discuss the most important questions you should ask a hard money lender to avoid unpleasant incidents.
What Is the Maximum Loan-To-Value You Will Offer?
The loan-to-value or LTV of a property equals the amount you’re borrowing in contrast to the final value of the finished project. For example, let’s say you want to acquire and renovate a $150,000 property, and after calculations, you need $100,000 more for renovations so that you can sell it later for $300,000.
Here at Titan Funding, we offer a competitive 60% loan-to-value ratio. So, if you need $300,000 to acquire and renovate the said property, we can help you with $180,000 and give it to you in only four days.
What Is the Maximum Amount I Can Borrow?
This question correlates to the first one, as the maximum amount you can borrow affects the maximum LTV the lender will offer. In other words, your pool of options is limited if the lender has a maximum loan amount of $150,000.
Luckily, Titan Funding’s hard money loans fall between the $100,000 and $5 million range, so you don’t have to worry about insufficient financing.
Do You Base LTV on Purchase Price or After-Repair-Value?
Although most hard money lenders, including us, base their LTV calculations on the After Repair Value (ARV), some use the purchase price instead. Let’s say you plan to buy a property for $150,000, invest $50,000 of your own money, and sell it for a final amount of $250,000. Since you only have $50,000 to invest and need $150,000, you decide to contact a lender. A hard money lender like us can offer $150,0000, representing 60% of the ARV.
But, if we’re talking about a lender offering 60% LTV based on the purchase price, they would provide you with only $90,000. As you can see, LTV calculations based on purchase price don’t benefit you much as the ones based on ARV.
What Types of Properties Do You Finance?
Before looking for deals, you should know the real estate properties your potential lender prefers to manage. Sometimes, hard money lenders only deal with the type of properties they have more experience with. So, if the property you have in mind doesn’t align with the lender’s preferences, your application won’t be approved.
Do Your Loans Cover Properties Nationwide or Only in Certain Geographic Areas?
Some hard money lenders operate in certain geographic areas, while others offer services in larger markets or nationwide. And maybe offering loans nationwide or in several cities sounds like the perfect opportunity to expand your pool of potential properties, but be careful because lenders that operate nationally may have a less comprehensive understanding of a particular market.
Besides, most local hard money lenders provide clients with local support and can even pair you with advisors.
How Do You Handle Loan Repayments?
This question is vital for deciding whether you want to do business with a particular hard money lender or not. You’ll be asking for the modality to pay the loan. After some time, some lenders may ask for a monthly payment that includes the principal amount plus the interest. Others prefer investors to pay everything at the end of the deal to make the process easier. So, before signing the contract, make sure you know the specifics of the payment modality.
How Do You Handle Loan Draws?
The traditional lending system is designed to give clients a single lump sum to purchase a property. Traditional lenders are positioned to take this risk since they use properties in perfect condition as collateral.
However, hard money lenders not only lend money based on what the property will become, but if the client fails to pay the loan, their collateral ends up being a distressed property. For this reason, hard money lenders issue loans in increments, also known as draws.
That means that a hard money lender will give you a draw to purchase the property, then another for the repairs, and once these are finished, you’ll receive the final one.
This question is important because every hard money lender uses a different method and milestone system for the draws.
Are There Any Net Worth or Liquidity Requirements?
One of the most significant advantages of doing business with a hard money lender is that you don’t need millions of dollars in your bank account or a perfect credit score for your application to be accepted. However, some may have particular net worth or liquidity requirements.
For example, they may only do business with people worth over $500,000 or those carrying over $100,000 in cash or the equivalent on hand.
What Are Your Origination Fees and Interest Rates?
Both origination fees and interest rates are how hard money lenders make money.
The time and effort it takes to put together a loan usually represent origination fees, which are charged either as a flat fee, a percentage in the loan, or a combination of both.
However, interest rates refer to the fees hard money lenders charge clients for using their money. Since these operations represent a greater risk, the interest rates are higher than those in traditional loans.
So, before signing anything, make sure you know the exact amount you’ll be charged to avoid miscommunication.
Are You Looking to See Your Real Estate Project Come to Fruition?
Here at Titan Funding, we’re committed to helping investors, builders, landlords, flippers, and anyone wishing to finish their real estate project achieves their goals within the stipulated time. If you’re in Florida, please don’t hesitate to get in touch with a member of our team. We’ll get back to you as soon as possible.