Hard money is a term that describes borrowing without going through the traditional lenders to purchase real estate using the property as collateral along with other factors to approve the loan. When borrowers either lack time to go through the conventional process or are unable to attain lender approval, hard money lenders offer an alternative.
Real estate investments can be highly lucrative when done right. Purchased at the right price and every step and figure calculated, from acquisition to closing when you sell the rehabbed property. Hard money loans are well-suited to those who are flipping real estate. Being an experienced flipper may lend you an advantage in gaining approval of a hard money loan. Otherwise, partnering with a professional investor can lend you credibility with a hard money lender. While borrowers can use them to finance the purchase of a primary residence, it would be highly advisable to acquire a new loan as quickly as possible.
We will explore the basics you should know about using hard money lenders in Philadelphia.
The loan-to-value (LTV) ratio is typically low with hard money lenders in Philadelphia, with a maximum ranging somewhere near 50 to 70 percent LTV. The loan amount divided by the property’s value determines the ratio and lets the lender know if the loan falls within the desired range. These ratios ensure their ability to avoid taking any loss on loans. Some of these lenders will assess the after repair value and lend based on that value.
Hard money loans are asset-based, for the most part. Investors need to understand that the property’s value is relevant to hard money lenders in Philadelphia. Your credit history matters little because these lenders can benefit by earning high profits on interest from borrowers with a poor credit history or for the convenience of fast financing.
Borrowers who search for short-term loans of no longer than 12 months have the option of using hard money lenders in Philadelphia. Some of these lenders may also be willing to finance the rehab costs. These loans may be funded by a private individual or by an investment fund. With down payments of 10, 20, or even 30 percent, you will pay more for these loans because hard money lenders recognize that borrowers frequently have bad credit and few other options.
You pay higher interest for using hard money lenders in Philadelphia. Rates are generally found at somewhere between 8 and 12 percent because these loans are considered high-risk loans. Other fees included with these loans carry origination fees charged in points, Each point is one percent of the loan value, and for hard money, loans can be as high as 8 points. There will likely also be expenses for appraisals, processing documents, and builder’s risk insurance is likely to be required.
Prepayment penalties charged when paid off for a loan before the agreed-upon terms are not uncommon when using hard money lenders in Philadelphia. These loans are usually structured so that your payments go towards the interest before you even begin to pay down the principal as the loan draws nearer to the end. Hard money lenders take risks; however, their penalty for failed loans is acquiring the property and selling it.
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