Author: David Armenta
Date: 5-21-2023
When applying for hard money loans, it's important to familiarize yourself with key terms to ensure a successful application. Here are 10 must-know terms related to hard money loans:
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Hard Money Loan: A type of loan that is secured by real estate collateral rather than the borrower's creditworthiness. Hard money loans are typically funded by private investors or companies.
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Collateral: The property or asset that is used as security for the loan. In hard money lending, the collateral is a crucial factor in determining loan approval and terms.
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Loan-to-Value (LTV) Ratio: The ratio of the loan amount to the value of the property being used as collateral. Hard money lenders usually have maximum LTV ratios they are willing to lend against.
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After Repair Value (ARV): The estimated value of a property after it has been repaired or renovated. For real estate investors seeking hard money loans for fix-and-flip projects, the ARV is an essential consideration.
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Interest Rate: The percentage of the loan amount charged by the lender as the cost of borrowing. Hard money loans often have higher interest rates compared to traditional bank loans due to their short-term and higher-risk nature.
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Points: A fee charged by the lender at closing, with each point typically equal to 1% of the loan amount. Hard money lenders may charge points as a way to compensate for the risk involved in the loan.
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Loan Term: The duration of the loan, typically ranging from a few months to a few years. Hard money loans are usually short-term, ranging from 6 months to 3 years, depending on the lender and the specific circumstances.
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Prepayment Penalty: A fee imposed by the lender if the borrower pays off the loan before the agreed-upon term. Some hard money loans may include prepayment penalties, so it's important to understand the terms before signing the loan agreement.
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Underwriting: The process by which a lender evaluates the borrower's financial situation, creditworthiness, and the value of the collateral. Hard money lenders have their own underwriting criteria, which may differ from traditional lenders.
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Exit Strategy: A plan outlining how the borrower intends to repay the loan. Hard money lenders want assurance that the borrower has a viable exit strategy, such as selling the property or refinancing with a traditional loan, to ensure repayment.
Understanding these key terms will help you navigate the process of applying for hard money loans more effectively. However, it's important to note that specific terms and conditions may vary among lenders, so it's essential to review and discuss the details of each loan offer carefully.
