Hard money loans are significantly easier to obtain than bank loans, but borrowers still need to know what they are getting into before they submit an application. If you are thinking about using hard money to finance a real estate purchase, here are five questions that you should ask yourself before you sit down to talk with your hard money lender:

1.      How will you cover the monthly loan payments?

Because hard money loans are asset-secured loans, it’s important to know that you will be able to keep up with the monthly loan payments so that you don’t lose the property securing the loan. Many hard money lenders (such as Montegra) offer loans that are payable interest only. Some will also include funds to establish a payment reserve if the property has a high enough loan-to-value (LTV) ratio to cover the increased loan amount.

2.      What does your credit history look like?

While hard money lenders do not typically base their approval decisions on credit scores the way that banks and other institutional lenders must, your credit history and score can still have an effect on the interest rate that you receive for your loan. Therefore, it’s a good idea to resolve any issues you might have with your credit before you submit your loan application.

3.      How much is the return on your investment?

Before applying for a hard money loan, it’s important to weigh the costs of the loan, which are almost always higher than those of a conventional commercial mortgage, against your expected return (either from selling the property or from increasing its income-producing potential).

4.      How will you pay off the bulk of the loan?

This is perhaps the most important question to answer before you secure a hard money loan as it is an answer that your hard money lender is sure to want before they approve and underwrite your loan. Hard money loans are typically short-term loans, lasting only six months to three years. Common exit strategies include refinancing with a traditional lender or selling the property.

5.      Are you working with a reputable lender?

As with any industry, there are good and bad hard money lenders. Beware of brokers who are masquerading as hard money lenders, but who cannot actually make the decisions about whether to fund your loan themselves. Reputable lenders will provide you with referrals and testimonials to help you perform your due diligence on them. You should also request information about their loan terms and steer clear of any lender who either balks at providing their terms or whose terms seem too good to be true (as they usually are!).

Contact Montegra if you have any other questions about how hard money loans can work for you; we’ll be happy to answer them for you.