2. You Have Enough Money for a Down Payment
A hard money loan may also come with a draw schedule, which indicates the times you’ll be able to withdraw parts of the full loan. It’ll be negotiated during the underwriting process and ultimately determined by the lender, based on when remodeling projects are initiated during the plan. There are few circumstances in which you’ll receive the full loan amount upfront. Functionally, a hard money loan is more like a line of credit than a loan.
“If we do fund the rehab ourselves internally, we would do it on a reimbursement draw schedule,” Howard continues. “Say we’re funding a $100,000 rehab: they would pay for the first $25,000 upfront [as a down payment], we would send a third party inspector out there who will inspect the budget from the get go and they validate [with pictures that] the work is being done on budget and then we reimburse them.”
If you take out a hard money loan, you won’t be receiving the full amount upfront. You have to put down a percentage as a down payment. This is common for any loan used to flip houses, as most house flippers are required to put down at least some of their own money. Tayne says the typical down payment is 10%. Some lenders might require a down payment as large as 20%.
3. You Can Justify the High Interest Rate
Interest rates for a hard money loan are higher than if you go with a traditional lender. You’ll be paying interest every month, so don’t take out a higher loan amount or higher rate than you’re able to afford. Take into account the expected post-rehab resale value of the home; you may be able to offset the high interest rate with the expected profit.
Finding Hard Money Lenders
Hard money can be found at specialized hard money lenders. You won’t be able to get a hard money loan from a traditional bank or mortgage broker. Here are some tips for figuring out if a hard money lender is right for you.
Check the Company’s Reputation
Hard money loans are underwritten by smaller, local lenders instead of the established banks you’re probably familiar with. So it’s a good idea to do your due diligence when vetting a lender. “Make sure they have a good reputation. I’m a member of the Arizona Private Lending Association, as well as the American Association of Private Lenders (AAPL). You want them to have accreditations,” Howard says. You should also review the lender’s website, social media, and reviews online to get a sense of how the company communicates and how customers interact with it.
Ask a Lot of Questions
Before signing any loan agreement, you want to know what you’re getting into. Especially with a home rehab – which can often run into unforeseen construction issues. “Always plan on having it go longer than you think it’s going to go,” Samuel says. “Give yourself a buffer. A lot of these loans end up getting extended or continued. Make sure to ask your hard money lender what happens if you don’t come in on timeframe and what the extension process is payday loan places in Gallatin like.”
Watch Out For Red Flags
If a situation seems sketchy, it probably is. There should be no surprises during any step of the process. Howard says to watch out for anyone charging application fees. No reputable lender charges fees to get into the door, and every fee after that should be disclosed upfront.
2. You Can Close On the Loan Quickly
So make sure you’re being as precise as possible when coming up with the initial plan. “If you’re more experienced, you know how to use [hard money loans] properly,” Tayne says. “If you’re less experienced, you can get jammed. You could overestimate or underestimate what your expenses will be on the flip…and end up with a challenging situation.”