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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