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How To Become A Hard Money Lender
Many people require loans to meet their financial needs. We all know the primary source of acquiring loans, i.e., from financial institutions such as banks and credit unions. Nowadays, it is quite easy to acquire a loan. However, the process is still time-taking. The borrower is only eligible to acquire a loan if he fulfills certain criteria. This includes details of creditworthiness, DTI (debt-to-income) ratio, financial or debt history, social security number, proof of the reason for requesting a loan, etc. What if the borrower does not meet these requirements? Or what if he does not possess enough time until the issuance of a traditional loan? The alternate and immediate solutions to this problem are provided by hard money lenders.
What Is Hard Money Lending?
Hard money lending is often heard when talking about real estate investment. This type of lending is secured by land or property. i.e., a hard asset; hence the name. It is often known as asset-based lending. Hard money lending is also called a bridge loan or short-term asset-backed bridge loan (STABBL). This is because a hard money loan is suitable for meeting immediate, short-term financial needs.
Real estate investors or developers, property flippers, or renovators often need immediate funds to commit a deal. Traditional financing organizations, like banks and credit unions, do not promote hard money lending. Also, they issue loans after a lot of paperwork and have a prolonged approval procedure. Thus, the quick and easy resources in such a situation are individual financiers, companies, and private money lenders rather than banks. The hard money lending process is neither time-consuming nor requires approval procedures. It solely depends on the asset value over which the loan is demanded. And it has no concern with the financial stability of the borrower.
However, this can be quite risky. Private lenders require a down payment and extend hard money loans over a greater interest than other conventional financing organizations. Also, the loan term is shorter, within which the debtor must pay back. Hard money lending involves one-to-one correspondence between the borrower and the lender. This creates room for flexibility in terms and conditions decided between the debtor and lender.
Who Can Be a Hard Money Lender?
Hard money lenders can be big firms, private individuals, or groups of investors looking for short-term investments. They provide immediate loans for a short time over a high return rate. Borrowers often choose hard money lenders when they require quick finance for investment. Or when they fall short in the criteria of acquiring a loan from banks.
The hard money lender assesses the risk of the debtor. The higher the risk, the larger the amount of interest. The lender also inquires about the value of property or land used as security. Terms and conditions, including the amount of loan, payback time, and interest rate, are then decided between the two parties. The amount of loan depends on the LTV (loan-to-value) ratio. It is between 50% and 70% of the asset value. The loan period ranges between 1 and 3 years. Borrowers can pay back the lender’s amount either all at once or through small paybacks.
People or companies with excess and spare money from an investment point of view can be hard money lenders, especially those looking forward to multiplying their revenue in a smaller span and reusing it in the near future. Hard money lending can also be a better option for individuals holding a savings account because the interest rate is higher as a private lender. Individuals also make passive income through an indirect share in the real estate industry as a hard money lender. Retired people can be hard money lenders using their retirement savings account. This way, they can better upscale their savings.
What Are the Pros of Being a Hard Money Lender?
Borrowers, mainly real estate developers, investors, or flippers, need investors to support them with swift funds. In return, they are ready to pay higher interests than banks. The huge interest amount is one of the top prizes an individual enjoys being a hard money lender.
Real estate is one of the world’s biggest markets. Being a hard money lender is one way to become a part of this profitable industry besides making a worthwhile profit on investment.
Being a lender doesn’t cost you extra efforts besides scrutinizing the borrower. With multiple modes of payment, the lender receives the loan amount easily while sitting at home or, at most, goes out and collects the amount or check.
You may think that owning a savings account can earn you profit. However, being a hard money lender can provide over 6-15% more profit than a typical savings account. This depends on the interest rate a lender may charge.
As discussed above, hard money lending is also beneficial for individuals aiming for passive income.
Retired personnel can also expand the pension funds in their account by simply being hard money lenders.
Even if a borrower fails to repay the loan amount, the money lender can still get the investment. This is because of the asset over which the loan is demanded.
What Are the Cons of Being a Hard Money Lender?
The obvious and biggest drawback of being a hard money lender is the non-payment of the borrower. In cases when the borrower fails to return the loan amount, the lender’s amount is still protected due to the asset. The lender has the right to file a lawsuit against the borrower. However, the legal procedure can be bothersome. The recovery time is quite unpredictable.
Being a hard money lender calls for great attentiveness and cautiousness. A hard money lender must know the real estate and concerning investment strategies. The lender can minimize the risk with a thorough evaluation of the borrower, risk and default assessment of the borrower, and the property value.
How Do I Become a Hard Money Lender?
It may seem effortless to become a hard money lender. Getting started as a hard money lender requires a thoughtful mind. One must keep a sharp eye on the details. Here are some important checkpoints to analyze if you are the right person with complete knowledge to become a hard money lender:
- Resource analysis
- Investment source
- Borrower and asset evaluation
- Establish terms and conditions
- Ensure proper documentation
The first and foremost step is to determine the resource of the investment amount. This can be the idle amount lying in your savings account or any surplus revenue. It must be easily accessible and transferable. Make sure your account permits and is favorable for hard money lenders.
The next step is to estimate the right amount you are determined to lend at once. Offering your entire savings to lend might not be a mindful choice. Moreover, investing the entire amount in one place might be too risky. Minimize the risk by investing in various opportunities.
After determining your resource capacity, look for the right lending opportunities. For this, you may seek help from a reliable investor through various investment associations. While dealing with an unfamiliar investor, make sure they abide by the regulations and possess the PPM (private placement memorandum) for private lenders. Contrarily, you can seek help from your friends or family associated with the real estate market.
Borrower and asset evaluation
Once you are into hard money lending, it is important to gain knowledge regarding real estate investment strategies, though all the work is to be done by the investor. But this will help you in the long run. No matter how experienced the investor is, keeping a double check will reduce the risk. Play your part and conduct a detailed evaluation of the borrower and asset value. Carry out the background check of the borrower, either paid or on your own. This will make evident that the borrower is not a bankrupt person, a defaulter, or under trial for previous settlements. Do not invest until you are not completely assured.
Establish terms and conditions
After a satisfactory evaluation of the borrower, you can proceed with the lending. Terms and conditions are necessary for every agreement. The borrower and lender can negotiate and agree upon the loan terms. These terms may include the mode of payment and repayment, down payment, type of interest and interest rate, loan period, etc.
Ensure proper documentation
Many people overlook the documentation procedure. When finalizing an investment deal, no matter how unnecessary it may seem or how trustworthy your relation might be with the borrower, getting an official document must be a part of your routine as a money lender. This will not only protect the lender in case of a problem but also enable both the lender and borrower to abide by the rules. The original legal document must be kept by the hard money lender. A copy of the same documents is to be provided to the borrower. In case of nonpayment by the borrower, the lender can only take legal action upon presenting the original documents before the court of law.
Besides initial documentation, the track record of payback by the borrower must be practiced as well. Once the repayment has started, each payment, along with the amount and mode of payment, must be documented.
Becoming a hard money lender is worthwhile to upsize the savings and earn profit. It is another way to passively step into the real estate market. However, keeping up with the investment strategies and conducting the proper research before investment requires effort. A non-payment by the borrower can be risky. However, legal help can turn the events in favor of the lender. Ensuring the best hard money lending practices can lead you to profitability. Yet, risk estimation and management are crucial in hard money lending.