When it comes to loans, there are several ways to finance your real estate purchase. Conventional loans with a local bank are what most people think of. Or, you might think of some of the government loan programs available in the market. But there’s a third option that you might want to consider the next time you are looking for real estate financing in Texas. And that’s called “hard money lending”. Read on for what you need to know about hard money!
What is Hard Money Lending?
These types of loans are usually made by private lenders or companies. The terms of the loans are shorter than what conventional lenders offer. Financing from a conventional lender might offer 20, 30 and even 40 year financing. When it comes to hard money lending, these loans generally have a much shorter term. The terms can range from 12 months to 3 years, depending on the loan and lender.
In addition, the interest rates are higher than conventional or government financing offerings.
Real estate loans are the most common type of hard money lending. Some lenders might consider hard money loans for businesses, depending on the terms and conditions. Each private lender is different and focuses on certain types of loans and a range of loan terms.
This type of loan is less based on your credit scores and more focused on the value of the collateral or property. So if your credit history includes a bankruptcy or other issue, this is an effective way to get financing.
One point to note is that the downpayment requirement is much higher. The loan to value is usually a lot less than other types of financing. In general, you can expect to have a loan to value of only 60% to 70% of the property value, depending upon the lender. That means you will need to have the balance plus monthly payment reserves available.
Payments on your loan is usually interest only for the term of the loan.
Texas Hard Money Lending
If you have a property in Texas, we can help you determine if this type of financing is right for you and your project. Understanding the terms and conditions for this type of financing is critical! Once you learn what you need to know about hard money, you can use them to make a profit.
To start with, there are several instances where this type of loan could be the best way to go.
If you need financing quickly
Hard money lenders focus on the collateral and put less time and attention on your financial situation. This means that they can offer a very fast turn around not only for approval, but for loan closing as well. That means you get a leg up on potential buyers going the more conventional financing route.
If your credit score is less than perfect –
Getting financing these days is definitely more difficult than it used to be. If your credit score is not as high as needed for conventional lenders, that can be an issue. Or you might have a bankruptcy on your record. Both of these can make it far more difficult to get financing.
If flexibility is needed
Since these are not conventional loans, there are some options not available with conventional lenders. You are dealing directly with a lender and not a loan committee. So talk to them! Your hard money lender might have the ability to tweak some of the terms and conditions of the loan.
If you’re only in it for the short term
There are a lot of reasons to only need financing for a year or two. Some of the more popular reasons are:
Fix and flip property
Renovation to permanent financing projects
One of the most common reasons is if you are doing a fix and flip project. Here, your goal is to get the property under contract and closed. You are then planning on renovating or doing something to the property before putting it back on the market.
In this case, traditional financing can take too long. It can also mean the difference between getting the property or having someone else get the property.
Like most things, there’s also a flip side to consider with this type of financing.
What you need to know about hard money is the loans aren’t cheap compared to some conventional loan programs. So if you are looking for longer term financing, you might want to look at other options. And if you can wait for a conventional lender to finally approve you, then this type of loan might not be best.
Loan to Value Ratio
Like we mentioned above, under this type of financing, don’t expect to find an LTV of 95%, 90% or even 80% of the appraised value of the property. Your lender isn’t going to be going that high.
Most lenders will aim for an LTV of around 70-75% of the appraised value and expect that you will put up or fund the difference.
Finding the Right Texas Hard Money Lender
If you’ve determined that a hard money loan is the right fit for you and your project, it’s time to start finding the right lender.
Make sure that you look for one that’s been in business awhile.
Your lender is as interested in your business as you are interested in finding financing. Set up a time to meet and discuss your project. Make sure that there’s a fit between you and the lender. After all, it’s an important relationship in your business success.
Review loan terms in advance of deciding. While interest rates can change quickly, get an idea of what the rates will be as well as the other costs of the loan. You can then compare that to other companies that you speak with.
A hard money loan can be the best option for many projects. It’s important to do your research and explore your options. If you have any questions about what you need to know about hard money, feel free to contact us!