If you are in the market for a real estate loan and are not going the traditional route of getting a bank mortgage, an asset based loan is another option to access money on the property you want to purchase or refinance.
The reason being is asset based loan, or hard money loans, are more flexible than standard mortgage guidelines. Often times you can have bad credit, bankruptcy or foreclosure and still be able to get approved for a hard money mortgage. Of course the downside is the cost of these loans are higher as well as the terms are shorter.
Upfront costs to get a hard money loan are 2-3 points of the loan. So a $100,000 loan could cost upfront $2,000-3,000. And rates are in the 12-16 percent range. The maximum amount of loan (“LTV”) depends on the property, but will be typically around 70-75% of the value of the real estate.
BUT, just because the rates are less favorable, does not mean they are not negotiable. Hard money lenders are in the business of lending, and depending on your situation are willing to bend their guidelines to continue doing so. Here are a few tips when comparing hard money lenders to get you the best deal possible.
Upfront fees and rates
Are you looking to purchase a sweet real estate deal cash and need financing within a few days? Are you in the process of building your property and a standard bank will not loan on an unfinished job? Or are you just not qualified to get approval from a standard mortgage bank?
Depending on your situation, certain costs can be played around with to best meet your needs financially. If you know you will refinance less than a year after getting a hard money loan, negotiate a price that is higher in interest and low up front fees.
If you are planning to have a hard money loan until your credit is fixed or you get out of bankruptcy, discuss with the loan company a lower interest rate for higher upfront fees.
Term Length and LTV
The length of a hard money loan is usually around 1-3 years. If you are a real estate fix and flip investor, you probably won’t need the loan for more than a year, which is a benefit to the lender as they want to see their principle returned to them as soon as possible. This is a negotiating chip when speaking to the hard money lender, in that you will be putting the property back on the market very quickly. Since the property is being worked on to be worth more, their guidelines of loan to current value will be higher to take an account the remodeled value.
If you are needing a private hard money loan for more than three years, consider giving the lender more favorable terms, such as lower LTV to reduce their risk, to show more skin in the game in that you won’t default.
Developing a relationship with the private lending company
Most Private hard money lenders are small lending companies looking to establish a beneficial relationship with their clients, in which their loans are performing (being timely paid). Many times they will give concessions and discounts to clients they believe will stay with them over many years and many loans later. Discuss with them your long term outlook as a homeowner or property investor and how it is mutually beneficial in the long run for both the borrower and the lender.
The best way to negotiate terms with your lender, is to compare several different hard money lenders and let them compete for your business. Ask yourself first what is the loans intended purpose for and shop accordingly.