Thursday, June 20

5 Questions to Answer Before You Apply for Hard Money

Private lending offers a variety of options that are not available through banks and credit unions. Hard money is one of them. Hard money loans are available to people whose borrowing needs do not fit traditional bank and credit union criteria. Think of it as a way of borrowing outside the box.

Borrowing money is not something to be taken lightly. The more you borrow, the more serious your financial commitment. So it pays to really think about what you’re doing before you do it. Applying for a hard money loan is no exception to this rule.

Actium Partners is a hard money lender based in Salt Lake City, UT. They make loans in Utah, Colorado, and Idaho. They recommend asking, and answering, the following five questions before applying for a hard money loan:

1. What is my immediate financial need?

Lenders in the hard money space have a lot more flexibility compared to banks and credit unions. Still, many are very picky about the project they get involved with. For example, Actium doesn’t make loans for fix and flip real estate projects. They do not loan on any residential properties. But they do fund commercial property acquisitions.

All of this is to say that the financial need you are trying to fund will play a role in whether you get approved. Understand your needs and be prepared to search for a lender willing to meet them. Not every lender you come across will show interest in your project.

2. What collateral will I be offering to back the loan?

Unlike banks and credit unions, private lenders approve hard money loans based on the value of the collateral being offered as backing. Most hard money loans are written to cover real estate acquisitions. The properties being acquired are the collateral for the loans.

Ask yourself what collateral you will be offering. Bear in mind that its value must at least equal the amount you want to borrow. A higher value will make approval easier.

3. How much am I prepared to put into it?

Hard money lenders tend to require higher down payments than banks and credit unions. It is not unusual for a private lender to ask for 30%-50%. So ask yourself how much you are willing to put into it. How much cash do you have on hand? How much are you willing to invest?

4. Am I prepared for extremely short terms?

The terms on any loan define how long the borrower will be paying it back. A typical residential mortgage has a term of 30 years. In the hard money game though, terms are generally two years or less. Many private lenders prefer 6-12 months.

Ask yourself if you are prepared for extremely short terms. Assess whether you will have the ability to repay what you owe in such a short amount of time.

5. How quickly do I need to close?

This final question is less of a qualifier and more of an encouragement to look at the big picture. Ask yourself how quickly you need to close on the loan. Bank and credit union loans can take months to close. Hard money loans can generally close in a few days. The point of asking yourself about closing is to make sure you apply in time to get the deal done.

Hard money loans cover all sorts of needs in the commercial environment. But they are not the right option for every borrower. Before seeking out hard money, borrowers should ask themselves the right questions – and then answer them honestly.