Minimize the risk of default after obtaining a hard money loan in Houston

Over the years a multitude of labels have been used to describe hard money loans, but they typically indicate to one and the same thing with slight modification. You can also see hard money lenders being called by different names like Brokers, Loan Officers, Mortgage bankers or Agents but their basic role is all the same, i.e. getting the loan funded quickly. If you think that you need a hard money loan you need to work with a hard money lender who is specialized in this arena.

Why is the cost of hard money loans higher than bank loans?

One of the first questions that arise in the mind of the borrower is the reason for the high cost of hard money loans in comparison to bank loans or other loans from financial institutions. One of the primary reasons is that hard money loans are funded by private investors irrespective of the creditworthiness or financial stability of the borrower. The cost of hard money lending is generally determined based on two factors, one is the interest rate and the other is the upfront points (where one point is equal to one percent of the loan amount).

·         Interest Rate

Since hard money loans Houston represent a higher risk than other conventional lending institutions the rate of interest is also naturally higher. In return for the risk borne by the lender, he charges a higher rate of return. The higher the risk the higher will be the rate of interest for such loan amount. Hard money loan rates usually start at 10% per annum and soar higher depending on the risk involved in such lending.

·         Upfront Points

The upfront point usually remains 3 points higher than the prevailing bank offerings. Some hard money loans go even 10 points higher depending on the risk factor. These points are offered to enhance the yield of the hard money lender. The points will also vary depending on the loan amount. For a small loan amount, the upfront points will be typically higher whereas for higher loan amount it will be usually lower.

One of the simplest ways of calculating the cost of hard money loan is to consider the cost of not taking such loan. Many reputed lending companies provide an online hard money calculator to calculate the cost of borrowing from them.

How to minimize the risk of private money loans?

Since the cost of hard money lending is directly related to the risk involved in lending to a specific borrower, it should be the target of every borrower to try and minimize the risk of hard money loans. But how do you do it? Below are a few basic tips that can help any borrower in minimizing the risk from private borrowing.

·         Check your financial status

If you cannot afford to repay a loan, do not apply for one. Just because it is easy to obtain a loan from a private investor does not mean that you can pay it back. If you are financially stable it will also minimize the risk of getting a private loan.

·         Seek references from existing borrowers

If you can get details about a few hard money lenders, try to find out existing borrowers with whom the lender is currently servicing. When you are dealing with hard money loans in Houston, you need to be more careful than working with any bank or financial institution.

·         Check for the balloon payment

You might have the financial stability to obtain a private money loan but you may not be in a position to take up the balloon payment, i.e. a part payment that is required to be made to the lender at a pre-determined time. Failing to clear a balloon payment will cause the lender to foreclose on your collateral.

Make sure you conduct proper due diligence before applying for hard money loan as it will provide you with returns in the future.

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Know about the various concepts of hard money lending before applying for one

The concept of hard money lending has gained significant popularity over the years and has turned up to be a powerful means of financing for the majority of the real estate deals in today’s community. But still many people are yet to be introduced to the concept of hard money lending and the ways by which hard money lenders can play a major role in meeting both their short and long term monetary needs. From a layman’s viewpoint, a borrower from a hard money lender can avoid the hassles associated with conventional borrowing.

Down payment in case of hard money lending

The main criterion for getting a hard money loan sanctioned is the required equity or down payment in the property that will act as collateral to the loan amount. For residential properties, the minimum amount usually ranges from 25% to 30% of the cost of the property whereas for commercial properties it is generally 30% to 40% of the cost. In some situations, the borrower may use the option of cross-collateralizing wherein he can use multiple properties as collateral.

Since hard money loan is associated with a larger down-payment it has a higher chance of being sanctioned in comparison to a loan with a smaller down payment. This is because of the fact that the larger the amount of investment by the borrower in the project lower will be the intensity of the risk to the lender.

Considering the direct lending model

While many hard money lenders provide only for the property cost of the investment project and lend for only that part of the investment some go a step ahead by covering the rehab cost and the loan cost as well. Some hard money lenders Houston do not mandate a down payment in case a specific deal meets their lending criteria. Following the direct lending model, they fund up to seventy percent of the cost of property, rehab and loan cost. This means that the borrower literally requires no money for initial payment creating the possibility of massive profit potential. However, fitting everything below seventy percent of the After Repair Value can be difficult, but it is not impossible. In fact, these lenders scout to find deals that require no down payment.

What about the exit strategy?

An experienced investor in the real-estate market will have an easier time obtaining hard money loan than an investor who has recently started dealing in real estate. For a borrower who is trying to finance his first fix and flip project will have to share all the details of the property and the project with the hard money lenders in Houston. This is because the lender will be keen to know about the exit strategy to be undertaken by the borrower to repay the loan amount. Veteran investors usually have a preset exit strategy when it comes to dealing with real-estate investment.

Getting a hard money loan approved

Once the lender is satisfied that the potential borrower will be able to satisfy all his lending criteria, he will send a verbal communication to the borrower. The borrower will then need to fill out the application form for hard money loan wherein he is required to mention his assets and liabilities, income along with the loan amount applied for. Even if the borrower does not have a subject property at present he can obtain a pre-approved sanction letter for a specific purchase price. The letter obtained can be submitted later with the property offer to receive the loan amount from the hard money lender.

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