Property investors typically go to Hard Money Lenders for funding with their real estate deals. Hard Money Loans as the preferred funding option highlight fast access to funds and a simple undertaking process. Because they are asset-based, these loans are repaid in shorter terms and with higher interest rates as trade-offs.
Traditional Lenders are known to have rigid lending policies reinforced with layers of bureaucracy. In contrast, Hard Money Lenders can be more accommodating and flexible to different funding scenarios. Being community-based, they are easy to deal with and have a better grasp of local real estate markets. With the proper approach, hard money lenders can grant favorable terms and conditions to borrowers.
Knowing Hard Money Loan terms helps in negotiating beneficial terms with your lender. Understanding them helps you know where your position is and what your cards are.
In this article, you will learn about these terms and what you can do to get the best deals from your lender.
Key Hard Money Loan Terms You Need to Know
Listed are essential hard money loan terms you should familiarize yourself with.
Loan Interest Rates
Loan interest rates considerably affect your repayments, be they monthly or annually. They determine how much you will be paying for amortization. Thus, they may cut into your project’s profits. Hard money lenders charge relatively higher interest rates than traditional lenders. It is because of the risks they take in fast financing deals. Another reason is that Hard Money lenders gamble on the future value of the property you are rehabbing.
Loan-to-Value Ratio (LTV)
A Loan-to-Value Ratio, also known by its abbreviation, LTV, determines the maximum loan amount you can get from a property. For most hard money lenders, an LTV of 75% of the property’s After-Repair Value is their ceiling in funding real estate projects. To illustrate, if your project is worth $500,000.00, the maximum loan amount you can borrow is $375,000.00. The Loan-To-Value ratio determines how much is available to you to realize your goals for the project.
Points and Fees
Origination points are also known as the fees you pay to lenders for their services in processing your loan application. One point is equal to one percent of your loan amount. In a $200,000 loan, one point is $2,000.00. Thus, if your lender charges 5 points, you’ll be paying $10,000.00 as fees. Information and document verification, documentation, and underwriting incur costs, which the origination points cover.
Loan Term or Repayment Period
The term defines how long you are going to pay for the loan. Loan terms for hard money loans range from 6 months to 36 months. These are short compared to the 15 to 30-year terms for traditional loans. Short loan periods allow hard money lenders to recover their investments faster.
Payment Schemes
In hard money rehab loans, paying only the interest due per month is popular among real estate investors. Interest payments depend on the actual funds disbursed and not on the entirety of the loan amount. Tranche disbursements depend on the progress of your project or the percentage of its completion. In this scheme, the borrower pays the principal loan amount upon maturity.
Tranche Disbursement
Hard Money Lenders provide loan releases in tranches, especially for rehab and fix-and-flip projects. Tranche Disbursement ensures proper project management, ensuring funds go only to their intended purposes. They also require proof of completion before releasing funds. In a way, this type of fund release encourages strict compliance with the construction timeline.
Project Highlights You Want Your Lender to Know
Highlighting the positive points of your project can land you a good deal. Here are some ideas you can highlight when negotiating the best financing deal for your project.
Project Value and Potential
Project viability and profitability are crucial in loan underwriting. Before negotiating, prepare a compelling hard money loan proposal that answers all possible questions regarding your project. The proposal should include an overview of your project, background, and portfolio, to name a few. An exemplary proposal highlights the positive aspects and mitigates possible drawbacks of your project. You can check our blog post about writing loan proposals here.
Loan Exit Strategy
An Exit Strategy is vital for hard money lenders because it shows your pay-off options upon loan expiry. Some options include selling the property, refinancing, or loan transfer to traditional lenders. An exit strategy assures lenders that you can settle your debt when it matures.
Real Estate Investment Experience
Another factor that can influence the outcome of your negotiations is your expertise in real estate investments. A portfolio of real estate projects can help you secure favorable loan terms and conditions. Successful projects under your belt will help you prove that you have profitable real estate investments. A string of well-managed portfolios also says a lot about your experience.
Your Financials
Traditional lenders usually focus on a borrower’s debt-to-income ratio in loan evaluations. This ratio shows lenders if you can still afford to repay your loan. Traditional banks also perform extensive credit evaluations focused mainly on your financials. Asset-based lenders, on the other hand, focus more on your project. However, an excellent credit history is an advantage in negotiating better deals.
Negotiating the Best Deal
In negotiating, leverage on a win-win solution. The key is to compromise so both parties will gain from the transaction. You can work out the best deal if you understand where your lender comes from. They also need to make money out of funding your project. You can trade a higher interest rate for lower origination fees. You can also opt to increase your equity for a waiver on pre-payment penalties.
Conclusion
Convincing your lender to give you the best deal is an art form. Knowing what can directly affect your loan is part of negotiating a better deal with your lender. Coming up with the best deal means understanding key loan terms and convincing your lender of your project’s merits. Show your lender why your project is a win-win deal.
Remember, however, that not all times you can get a good deal the first time. Building a professional relationship with your lender, however, can. A history of viable, profitable projects and excellent repayment records alone can be your door to the best deals you can only dream of.
Start building with us at GL&L Holdings and let us take care of your funding needs. Call us now or send an email to info@gllholdings.com. You can also fill out our online pre-approval form here.
