Here’s an excellent question that hardly appears in print. And yet it’s one that most clients want to know.
How do I get a hard money loan at a reasonable rate?
Or others want to know how to get a cheap hard money loan. As though there was such a thing. This article explains why this is an impossibility or why we need to rephrase the question.
First we have to define ‘reasonable’. I assume that anyone asking this question is comparing interest rates of hard money loans to those typical of a traditional mortgage. But here’s the thing. You are not applying for a traditional mortgage. In fact, most borrowers who investigate hard money loans do so because their banks or other traditional lending institutions such as credit unions have turned them away. Hard money lenders lend from their own pockets and naturally want to protect their investments. They, therefore, set higher prices of interest in order to ensure that they will make some sort of profit. The risks – don’t you agree – are all the higher! They’re putting their money on you so they’re expecting – and are determined – to see plenty of return.
The more impressive your work history and experience in real estate and certainly the higher your FICO score, the more easy they’ll feel in lending you the money.
So you may get a ‘cheaper’ hard money loan or a loan that may only more likely reach mortgage interest rates – never the same though! – if you have a high FICO score – somewhere in the lofty 700s. It will also help you to show your lender other underwriting factors that include a bank account that can more than cover 12 months of expenses, a reputation of successful investments, and so forth. Otherwise, forget it.
Lenders make your repayments manageable
On the flip side, hard money lenders tend to space out the interest to make it manageable. You will receive monthly payments of only interest or interest and some principal with a balloon payment at the end of the term. Consumer laws also regulate that lenders limit their balloon payment to reasonable amounts and that, in most circumstances, we request a maximum of two prepayments (and these may not exceed a certain amount). So yes, we do charge higher interest rates than the banks, but we compound it over a very short term, so while these rates initially appear high, they actually ends up far lower than the computed interest paid for the conventional 30-year loan.
The latter case is called amortization and here too you’re protected by consumer bureaus for if we were to spread your loan out over terms that are close to or parallel those of the banks, you’d find yourself in a never-ending spiral of bankruptcy and would no doubt have to give us your property.
For those who still want to seek reasonable rate without comparison to bank rates, the advisable thing to do is – go shopping. You may want to compare rates.
The California hard money lender market for one is busting at the seams. More and more lenders join us each day and since we all want to find clients and make money, we’re becoming rather aggressive in our deals. You see this with the hiked LTV rates that most of us are offering (at recent count: 80-100%). Negotiate and you may also be able to win some cheaper rates.
Aside from which, there’s something else you’d like to know: Most of us don’t advertise our lowest interest rates on our websites. If you’re an experienced investor, we may consider offering you these.
So how can you get better rates?
In short, hard money lenders find it harder to trust those who not only have underperforming work history and terrible credit scores but also have no money. If you can prove that your story is the reverse plus that you have – or can get a few deals under your belt, lenders may consider starting you off on lower rates or, lowering your rates once you become their favorite client.
The best advice that many hard money lenders give is to choose a lender whom you trust, stick with him, develop a relationship with him (or her), strike a few deals, repay your loans and, over time, ask for more favorable terms. You may likely receive those – even without your asking.
In other words: if you’re looking for a reasonable rate that compares to a bank mortgage, hard money lending is a different field and only offers higher interest rates precisely because it’s taking a risk on you. Prove yourself with repeat deals and success and hard money lenders may better their rates in return. ..