Understand the risks and regulations.
Just because hard money loans have relaxed underwriting standards and consider the value and equity of a property rather than the creditworthiness of a borrower—doesn’t mean they’re adversely risky or universally unregulated. In fact, this short-term loan (secured by real estate) is ideal for borrowers who are looking to fix and flip, need to secure a land or construction loan, or are looking to act quickly.
Know your terms
Hard money loan terms are typically much shorter durations when compared to traditional banks. Hard money loans terms are typically up to three to five years, while banks typically offer terms up to 40 years. This quick turnaround makes hard money loans ideal for investors or developers who plan on owning a property just long enough to increase the value. Then the property is sold and the loan is repaid—most often within a year.
Know your regulations
Are hard money loans federally regulated? No. Each state has it’s own guidelines that regulates private money lenders via the Department of Real Estate. In most cases, hard money lenders must have a member of their business who holds a Real Estate Broker License. It’s important to note that transactions which occur across two or more states are subject to each state’s respective regulations. Lastly, a securities license is not usually required for private money lending, one may be required if a loan is being shopped around to multiple investors.
Know your red flags
While every hard money lender is different, one big red flag is the lender asking for upfront fees. If a lender asks for any fees and points upfront it’s a good idea to ask what fees, rates and other conditions are rolled into the loan. To take it a step further, prompt your potential lender for a full disclosure of fees and conditions with any loan before signing anything. Another red flag is a firm shying away from traditional means of communication. Get on the phone. Get in a room together. Take a closer look at hard money lenders who are wary to talk in person or over the phone.