The average price of homes sold in the United States in the third quarter of 2022 reached $542,900. That’s $69,900 more than 2021’s third-quarter average of $473,000!
So it’s no wonder more Americans can’t afford homeownership. Indeed, for 36 million households, the most they can afford is between $0 and $150,000. In all, only 28.4 million families can afford houses worth $500,000 upwards.
With such high home prices, more Americans now also choose hard money lenders for extra help. These lenders offer much quicker financing based on factors other than creditworthiness.
Thus, if you need financial help buying or keeping a mortgaged house, you might want to turn to a hard money lender.
Below, we’ve shared tips on choosing the right hard money loan provider, so read on.
Confirm Their Loans Meet Your Needs
Also known as bridge loans, hard money loans are loans secured by hard assets, often real estate. They’re usually for purchasing investment properties, like rental houses or apartments. However, you can also use them to buy and renovate decrepit properties sold for profits.
However, some lenders now offer a hard money loan called a foreclosure bailout loan. It’s like refinancing that revises or replaces an existing mortgage with a new loan. It can help homeowners avoid foreclosure and keep their current homes.
Not all hard money lenders offer foreclosure bailout loans, though. Many specifically indicate their borrowers can only use their loans for buying properties.
So when choosing a hard money lender, confirm you can use their loans for your intended purpose. Otherwise, the financing company may reject your application.
For example, if you need a hard money loan to flip a house, ensure you pick a lender who allows such transactions. Likewise, go for one offering a foreclosure bailout loan if you need it to avoid losing your home.
Ensure Their Terms Match Your Repayment Ability
Hard money loans have short repayment terms ranging from six months to a few years. That’s at least a decade shorter than traditional mortgages with 15- up to 30-year terms.
Therefore, you must assess how long you can afford to repay a hard money loan. While a shorter term has fewer interest costs, it also has a higher monthly payment. So if you choose one that’s too short, you might have trouble making such high monthly payments.
And if you don’t make your payments on time, your debt becomes delinquent. From there, it can turn into a loan default. That then puts your home or real estate property at risk of foreclosure or repossession.
On the other hand, the longer the loan term you choose, the higher and the more your interest payments. That can exponentially increase the total cost of your hard money loan.
So when choosing a hard money lender, ask what terms they offer and their rules on pre-payments. The most reliable lenders let borrowers pay their remaining balances without a fee. You want that perk, as it lets you pay off your loan early and avoid extra interest payments and fees.
Consider the Loan’s Turnaround Time
As home prices skyrocket, the competition for lower-priced options is tighter than ever. A day late making your offer to a seller can mean losing a bid on an otherwise affordable house.
That’s why the speed at which a hard money lender processes and approves loans is so important. While many advertise closing periods as short as one week, they can still take 14 days or more to close.
So if you’ve already set your eyes and heart on a property, you need a lender who can close in as little as five days. Likewise, if you face foreclosure, work with a hard money lender who can issue funds quickly. If they take too long, you may lose the property you want to buy or the one you already own.
Reading online reviews about lenders can also help you learn how quickly they work. Both happy and angry customers often leave detailed counts about their experiences. Read these reviews to see if the lenders’ claims about their short closings are factual.
Check Transparency of Loan Terms and Conditions
The Truth in Lending Act (TILA) is a federal law protecting consumers from predatory loans. Enacted in 1968, it safeguards borrowers during their dealings with creditors and lenders.
One of the most crucial aspects of the TILA is the mandatory disclosure of loan information. That includes the following details:
- Total loan amount
- The loan’s annual percentage rate (APR)
- Loan application fees
- Late charges
- Pre-payment penalties
- Payment schedules
- Total repayment amount over the loan’s term
All those details must be in conspicuous writing on documents given to borrowers. Lenders must provide copies before allowing borrowers to sign a contract. They can’t force clients to sign on the spot, as doing so is against the TILA.
As a borrower, you’re responsible for reading the disclosed information. Besides, doing so helps you understand how much a loan will cost you monthly and throughout its term. You can then use those details when comparing loan costs from other lenders.
Let a lender know if a loan offer is missing any of the above-mentioned crucial details. If they don’t want to give it, file a complaint against them through the Federal Trade Commission.
It’s vital to note, though, that the TILA only protects consumers, not business owners. So if you’re taking out a loan for your house-flipping business, the act can’t safeguard you.
However, there’s no need to worry as long as you work with reputable hard money lenders. They practice transparency, so they provide all relevant details in their contracts.
Choose Hard Money Lenders With Solid Reputations
Please remember that hard money loans have interest rates ranging from 8% to 15%. That’s about twice or thrice as much as traditional mortgages.
That’s enough reason to do your due diligence as you compare and choose hard money lenders. Then, work with one known for its transparency and reasonable interest rates. Doing so can help you protect yourself from getting conned by predatory lenders.
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