If you are looking to invest in commercial real estate but do not have the best credit score, you may be able to get a loan anyway. Hard money lenders offer loans to people who own property that can be used as collateral for the loan. There are some things you need to know and to do when you are talking to private hard money lenders. Here are some tips to getting the most from your hard money loan:
- Be careful when you evaluate the fees. When you talk to hard money lenders, you have to make sure you are dealing with an actual lender. Many hard money lenders do require borrowers get an appraisal from a reputable third party. That is a normal part of this process. What you want to avoid is a prospective lender who wants to charge you to do their due diligence. Many times, when this is asked for, you are not dealing with a real hard money lender. These are scams. The loans never go through and the borrower ends up losing any of the due diligence fees they paid. If a lender asks you to pay more than 0.5% of the full value of the loan, walk away.
- Go to a real hard money lender and avoid brokers. There are people out there who are working to broker loans and deals on behalf of someone else. They may not make this clear when they are dealing with you and may try to pass themselves off as actual hard money lenders. When you are dealing with hard money loans, you need to deal directly with the person or people who will make the decisions about your loan. Make sure the people you talk to are the ones who are funding the loan themselves.
- Honesty is your friend. When you are trying to get any kind of loan, you need to be as up front and transparent as you can be. You need to tell the hard money lender of any potential issues that ma come up in the processing of your loan application. If you have tax liens against you, title problems you are dealing with or anything else that may impact the decision to give you a hard money loan, the lender will find out at some point. You will look a lot better to the hard money lender if they hear about these issues from you and not someone else. You should be able to show them what steps you are taking to deal with any issues you tell them about.
- Keep your eye out for red flags. Everyone wants to prevent themselves from being taken by so called “bat and switch” loans and deals. Some hard money lenders gloss over some parts of the hard loan process. The areas they often try to skim over include site inspections, environmental impact studies and document requirements. You can help yourself a lot here by doing your research before you start trying to get a hard money loan. If you know what all of the pertinent steps are, you can make sure none of them are skipped in the process of getting your loan.
- Remember, deals that sound too good to be true are. There are real benefits to getting a hard money loan. They can be very helpful when your credit is less than stellar and they close a lot faster than traditional loans. At the same time, if you talk to a hard money lender who makes promises that seem just too good to be true, you should be very concerned. It is always worth it to talk to more than one hard money lender. That will give you a better sense about what legitimate lenders will be able to offer you. There are a lot of people out there who prey on borrowers who do not have great credit scores.
The drawback to hard money loans is that the interest rates are often higher. They can be anywhere from 15 to 18% higher than traditional loans. On the flip side, they offer people a chance to get a loan they need when their credit is not great.