If you need to take out a loan to finance your commercial property investing but you do not have the best credit score, you do have options. There are hard money mortgage lenders who will give you a loan if you can use some equity to secure the loan.
Learn the lingo.
Before you start to talk to area hard money mortgage lenders, you should learn at least some of the terminology and understand the differences between the different kinds of loans. Often the phrases, “hard money rehab loans” and “private loans” are used interchangeably.
Hard money mortgage lenders require people to put up some property as equity to get a loan. The “hard money” refers to the hard assets that have to be included for the loan to be approved. Often hard money mortgage lenders have a focus for their investments and prefer to back the purchase of single family homes. These are typically not used for the borrower’s primary residence but as an investment. They also lend to people who are making commercial real estate investing purchases.
The loans are called “private loans” because they are backed by private companies, which are not subject to the same kinds of regulations that regular banks have to deal with. They can loan money to any borrower they want to, the loan just has to make sense to them. These lenders are more likely to overlook a bad credit history or score because of the equity that is used to secure the loan. This is why some people are able to qualify for secured short term loans.
When should someone approach hard money mortgage lenders?
There are some situations where looking for hard money loans are appropriate. If the borrower’s credit history or credit score makes them ineligible for a traditional loan, the may benefit from talking to hard money mortgage lenders. Other times, the borrower does not have any issues with their credit but the property they are looking to buy does not meet the standards set down by the more traditional financial institutions. This happens if the property needs repairs or sometimes if the property is being rented, the borrower may be turned down for the renovation financing they need.
People sometime look to hard money loans for other reasons. If the borrower needs to get the deal competed sooner than later, they may look for this kind of lending option.
Caution is the word of the day.
If you are looking for a hard money loan, you need to be very cautious about how you proceed. These loans are not regulated and are funded completely with private funds. Some hard money mortgage lenders try to chart huge fees upfront. There are some fees that they can charge, such as for a third party appraisal but if they ask for a “due diligence” fee, this should raise red flags. Most often, when this happens it means that the lender is not a reputable one and you should keep looking. The fees should not be more than 0.5% of the full value of the loan.
Keep an eye out for brokers.
Some brokers will try to pass themselves off as hard money mortgage lenders. You need to know who is doing the actual lending. That is another reason that you need to really look into any hard money mortgage lenders you are thinking about working with.
Watch out for the old “bait and switch.”
You need your lender to go through all of the steps to get you the loan that you need. The documentation all needs to be in order. The site inspections need to be done. Any title issues needs to be dealt with. If there are any environmental considerations, they need to be made. You should know what all of the steps are to make sure your lender and you do everything you need to do to make the deal work.
Remember, if it sounds too good to be true, it probably is.
Some hard money mortgage lenders take advantage of people who have a bad credit history or score. You need to use your common sense. You need be wary of deals that are too good..
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