Hard money mortgage loans can be a convenient way to grow your real estate portfolio or make a change in your properties. However, like any loan, getting a hard money mortgage loan is a big decision. It’s important to conduct research and understand if a hard money mortgage loan is the right decision for you and your circumstances. Keep reading for the six things you should know before you get a hard money mortgage loan.
1) Know Your Interest Rates
Hard money loans typically have higher interest rates than a loan from the bank. This is because a hard money loan is approved much quicker and is more of a short-term solution.
The actual interest rate will vary state to state, and from lender to lender. It’s critical to understand the interest rate on your hard money loan and the payment schedule. It can be helpful to calculate the total interest you will pay over the time of the loan, so you have a full understanding of what you’ll be expected to return.
2) Loan to Value Ratio
The loan-to-value ratio is a simple property calculation that helps you better understand how “risky” your loan would be.
Loan-to-value is calculated as the amount borrowed / the property purchasing price.
So, if you purchase a $200,000 home, with a $40,000 down payment and a hard money loan for the remaining amount of $160,000, then your loan-to-value is 80%.
Note that your loan-to-value uses the property purchase price, not the property market value. So, if the property increases in one year from a $200,000 home to a value of $250,000, your loan-to-value doesn’t change.
According to Investopedia, an ideal loan-to-value is 80% or lower. A higher percentage likely indicates that you are purchasing outside of your threshold, and you are at a high risk of not being able to pay back the loan.
3) Balloon Payments
Your hard money mortgage loan will (likely) start off with monthly interest-only payments. A balloon payment is then due at the end of the loan for the outstanding balance. You should be prepared for this payment, and have a clear understanding of when it’s due so you can be prepared. Most often, properties are sold, or loan is refinanced, to pay the loan off in full.
4) Credit Score
A hard money lender will look at your credit score when you apply for the loan. Unlike a bank, a low credit score doesn’t mean you’ll be denied a hard money loan. However, to ensure the risk isn’t high for the lender, they will evaluate your current income or expect a loan-to-ratio that favorable.
5) Hard Money Loan Investors
Hard money loan establishments use a network of private investors to source the capital for giving out loans. These investors are everyday, hardworking people. Investors can be teachers, doctors, small business owners, and lawyers. These people choose to invest with hard money loan lenders as they understand people are more than just their credit score or their credit history. And, often, they have applied for a hard money loan in the past themselves!
6) Reasons for a Hard Money Loan
Hard money loans are generally ideal for short-term loans. Most importantly, hard money loans are an option for people who have been denied by the bank. The bank denies people for a multitude of reasons (past foreclosure, late mortgage payments, a past bankruptcy), even if the individual is in good financial standing now. A hard money loan lender works with you to understand the complexities of your situation and help you find a solution. Ensure you work with a reputable hard money loan lender that has your best interests in mind.
For individuals looking for a loan in Texas or Tennessee, WildCat Lending is the hard money loan lender for you. WildCat Lending produces fast, reasonable, and secure real estate loans that enable you to quickly close on residential investment properties. The partners at WildCat Lending bring over 50 years of experience in real estate lending and investing to the agency, and can customize loans for each individual’s unique set of needs. Call now for your consultation at 972-525-4777.