A hard money loan requires the recipient of the loan to leverage real estate against future losses. These loans are used by land developers, architects and small businesses to purchase more property or machinery without liquidating assets. Before you get a hard money loan, understand the risks and benefits of this type of lending.
Search for lenders who are experienced in hard money loans and other non-traditional lending. Major banks and financial institutions steer clear of hard money because of the risk involved. Find a lender who has a portfolio of success stories to share with potential clients.
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Shop for the right hard money rates by requesting information from a variety of sources. Interest rates on hard money are determined by the current market for these loans instead of the federal interest rate. The best research tool is a stack of loan quotes that cite the full range of rates available.
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Hire an appraiser or real estate expert to determine the value of your land. Land value and potential use are critical criteria in determining the loan to value (LTV) ratio. These professionals will provide you with photos, testimonials and other documents you need to land the right hard money loan.
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Consult with a real estate attorney to iron out the best payment arrangement for your hard money loan. You can get caught up in a terrible financial situation if the payment schedule is too rigorous for your finances. Pay particular attention to standards for defaulting on the loan and early payment fees.
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Utilize one hard money loan at a time to avoid irreparable damage to your credit report and loan worthiness. These loans are great to help you finance a new development project, but don't get one if you plan to juggle multiple properties at the same time.
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Arrange building permits and construction contracts after you get a hard money loan to avoid using these loans in the future. This method of lending is meant as a temporary fix instead of a long-term solution. Take care of these administrative tasks as soon as you make the initial investment with your hard money funds.
Tips & Warnings
Speak with your state's attorney general office to determine regulations on hard money lending. Most states have steered clear of regulating hard money loans to allow small businesses to expand rapidly using their credit. Know the legal atmosphere for this type of lending before you sign any forms.
Construction contracts protect the buyer and the contractor. Hard working construction worker at a construction scene. image by Andy Dean from Fotolia.com
