We all get excited over certain opportunities, and a good real estate investment is no exception. Hard money lenders know that timing is everything in this market, so they are willing and capable of working fast. However, there’s no substitute for careful research and sound judgement before finalizing a deal. The last thing you want is to be stuck with a property you can’t flip for a profit and a hard money loan you have to pay back.
Below are three important questions to ask residential hard money lenders before finalizing the deal.
1. How much experience do you have in hard money lending?
No matter how nice or accommodating the lender appears, experience is everything. The lender should have experience in the industry as well as the type of hard money loan that you are requesting. All reputable lenders want to see their borrowers succeed. This is why many lenders also have real estate investing experience and can advise you on which deal to take advantage of.
2. What is the interest rate on the loan, and how many points do you charge?
Interest rate and points are two of the most important criteria when determining the cost of a loan. Though interest rates may vary, they typically are similar across lenders. By interviewing a few lenders, you can get an idea for the average interest rates on these type of loans. Also, be sure to ask about additional fees that may be charged, such as processing fees, transaction fees and notary fees. Ask for all pricing upfront so that you can compare loan costs between lenders.
3. What is the loan term, and is there a penalty for prepayment?
Make sure that the payment terms will work with your timeline. Most hard money lenders have terms of 1 to 2 years, though some may give you up to 5 years. And, it’s not uncommon for hard money lenders to have a prepayment penalty (PPP), meaning that a minimum amount of interest must be paid on the loan. If there is a PPP, make sure it works with your timeline, otherwise you may have to negotiate.
One of the greatest benefits to working with hard money lenders is that they are flexible. They understand the industry and know that timing is of essence. Be honest about your needs and ask the right questions. Lenders like working with the same clients. If you develop a strong partnership, you can enjoy fast, reliable loans when you need them!