A hard money lender could be the best solution when you need fast financing. The correct hard money lender can get you the money you need to secure your next real estate investment.
That said, hard money lenders come with certain risks, so it’s essential to know how to choose the right one for your needs.
Not sure where to start? Read on to learn how to choose a hard money lender in Miami who will work for your goals.
What Is a Hard Money Lender?
A hard money lender is any lending entity — an individual or a lending firm — providing financing that is secured by collateral.
In a real estate context, a hard money lender provides funding to real estate investors primarily based on the value of the asset, instead of the borrower’s personal finances.
Compared to traditional lenders, like banks and credit unions, hard money lenders:
Can provide financing more quickly.
Have more ability to be flexible with their terms and risk appetite
Require significantly less documentation
For example, if an aspiring real estate investor wants to purchase a new property for rental income but doesn’t have a high credit score to qualify for a traditional loan, a hard money lender might give them the funding they need.
Hard Money Loans vs. Traditional Loans
Hard money loans are different compared to traditional loans in several vital aspects, including:
Generally, hard money lenders provide their funds more quickly than traditional lenders. Some hard money loans can be distributed in less than a week. In comparison, conventional loans usually take upwards of 45 days to finalize and for the money to show up in your bank account.
Hard money loans are commercial-use loans, which means they can only be used to finance investment properties. Residential assets can be financed using a hard money loan, but the property cannot be owner-occupied such as primary residences or vacation homes.
Hard money lenders may underwrite loans for more money compared to traditional lenders. However, this is contingent on the asset being high quality and fitting within their lending parameters, as many hard money lenders will specialize in financing a specific asset type or geographical area.
Most hard money loans have shorter terms than traditional loans. For instance, most hard money loans have terms of 1-3 years. In comparison, many home loans from traditional lenders can last for decades (the standard is a 30-year, fixed-interest rate loan). Because hard money loans are short-term loans, investors must have an exit strategy to pay off the loan. Common exit strategies include refinancing, selling the asset, or income from another source.
Considering that originating hard money loans are riskier to the lender, they often will have lower loan-to-value maximus, which means your down payment will need to be higher. Generally, a hard money lender will only finance up to 60%-75% of the purchase price or estimate value of the property.
Hard money loans come with more risk to the lender, and therefore are associated with higher-than-average interest rates. These can be anywhere from 10% to 12% or higher. However, hard money loans are interest-only loans with a balloon payment due at maturity. This allows for real estate investors to keep their operating expenses low while they qualify for longer term financing or sell the asset.
As mentioned earlier, hard money loans are asset-based meaning that the most important factor will be the quality of the collateral (the subject property), whereas for a traditional loan the borrower’s personal finances play a bigger role in getting approved and determining their ability to repay the loan.
Lastly, hard money lenders will keep the loans they originate on their books for the life of the loan. In contrast, traditional loans are often traded or sold between conventional lenders, like banks and credit unions.
Review: Loan Types
Given these differences, hard money loans are frequently beneficial for investors who need money fast and don’t usually qualify for traditional loans.
For instance, a foreign investor looking to purchase property in Florida for the first time may benefit from a hard money loan since they presumably don’t have a US credit score and may not have other normal financial creditworthiness attributes to fall back on.
7 Tips for Choosing a Hard Money Lender in Miami
Hard money loans can be incredibly beneficial and advantageous. That said, you need to choose the right hard money lender in Miami to maximize your financial flexibility and ensure you don’t have to deal with predatory loan conditions.
Here are seven tips you should use when looking for a hard money lender.
1. Pick a Lender that Specializes in Your Asset Class
Hard money lenders often have a niche they cater to and it's important to find one that aligns with your needs. For example, there are some hard money lenders that specialize in residential assets, others that specialize in commercial. There also hard money lenders that cater to fix and flip scenarios and others that prefer to finance completed assets.
A hard money lender should be able to provide you with an overview of their lending parameters when it comes to property type, states they lend in, and maximum loan amounts.
2. Look for Reviews
Furthermore, you should look for positive reviews about a given hard money lender or firm before doing business with them. Google the name of the firm or person in question, then see what previous business partners have to say about their experiences.
If a hard money lender has a bad reputation, it’s a good sign you should move on to another opportunity. If a hard money lender has a good reputation, they might be the perfect business partner through which you can complete your portfolio goals.
3. Check for Staff Qualifications or History
It’s also wise to ensure that a hard money lender is qualified and licensed for the local real estate area. Don’t stick with a dark alley transaction. Instead, ensure any given hard money lender is licensed within Florida’s housing and real estate markets or departments.
You may also find hard money lenders licensed under the National Mortgage License system.
Any license or qualification goes a long way toward proving a lender’s reliability and qualifications. Anyone can claim they are a hard money lender, and only those with the proper licenses or records can prove it.
It’s beneficial to work with a qualified, licensed lender since they’ll know what they’re talking about and are less likely to make mistakes when underwriting your loan.
4. Determine Fees and Ancillary Costs
As noted above, many hard money lenders may charge extra fees and ancillary costs to turn a profit and make sure they don’t take on too much monetary risk.
Don't settle for a hard money loan with outrageous origination fees, like 10%. Instead, keep looking for a hard money lender that offers reasonable origination and other fees, like 2% to 5%.
5. Consider Speed and Funding Types
Double-check how quickly a hard money lender can provide you with your money. They may have a general rule of thumb for most loan scenarios, but it's important to confirm if your specific transaction will require more or less processing work. For example, some lenders could fund a condo purchase in a few days, but may need more due diligence done to finance a commercial office space.
6. Pick a Local Lender
Typically, it's best to go with a local hard money lender. Local lenders know the unique market conditions that can affect housing markets in Florida and beyond. They will also see value where nationwide lenders may not.
For example, if you are looking to purchase a Miami property, a local hard money lender will already have some idea of how much the property is worth and what it might appraise for so they can provide you a more accurate quote upfront.
7. Work With a Transparent Lender
Lastly, only ever work with a transparent hard money lender that is upfront and honest about their fees and timelines. Transparency is a vital part of any real estate investing relationship, especially regarding hard money lending.
A reliable hard money lender should be able to itemize all associated fees and exactly how much you need to bring to the closing table.
Connect With the Well Connected
As you can see, a lot goes into choosing the perfect hard money lender in Miami, especially if you have an upcoming real estate deal.
The good news is that with direct private lenders like Vaster, that are backed by some of the biggest real estate firms in Florida, we have the resources and expertise to help you build a successful real estate portfolio.