People who want to invest in commercial real estate but want a bank loan can get hard money loans. This method has a big problem. It leads to high interest rates. However, It speeds up the approval process.
Let’s discuss this problem more deeply and find ways to solve it.
What Are Hard Money Loan Rates
Even though hard money loans can help you get money quickly, knowing how their costs are broken down is essential. Here’s a closer look at the parts that make up the total cost of borrowing:
Interest Rate. The interest you’ll pay each year on the loan. Because the lender thinks there is more danger with a hard money loan, the interest rate is usually higher than on a regular bank loan.
Points. Points are a one-time fee calculated as a portion of the loan amount. Think of them as interest that you already paid that lenders may charge to change the interest rate they offered. You might have to pay more points for a cheaper interest rate.
Origination Fees. These fees are what the lender charges to cover the costs of handling and managing the loan. They can be different based on the lender and the type of loan.
Which Factors Affecting Hard Money Loan Rates
Now, let’s look at how several significant factors affect these parts:
Loan-to-Value Ratio (LTV). This number looks at how much the loan is compared to how much the property is worth. If you put down more cash, the LTV goes down. This means the lender is taking on less risk, which usually means a lower interest rate, fewer points, and even lower startup fees.
Borrower Experience. Hard money lenders often look for people who have invested in real estate. A history of good projects can show that you can repay the loan, which could lead to better terms. On the other hand, rates and fees might be higher for people with little experience.
Property Type. What kind of property you’re buying also matters. Lenders may think that multi-family homes or stores open for a while are less risky than fixer-uppers or land that has yet to be built on. Properties with less risk could get lower rates and fees.
6 Tips for Lowering Hard Money Loan Rates
Hard money lenders want things to go quickly, but they also want to be sure they’ll get their money back. Here are six unique, doable tips to help you get lower hard money loan rates. They focus on places where other people may have missed them.
Tip 1: Strengthen Your Deal Structure
Do more than the basics. You should show the lender a property and an entire company plan that makes the deal less risky. A thorough hard money loan pro forma should be part of this plan. This financial projection shows how much your project will make and how much it will cost. It shows you can afford to return the loan and some extra cash.
Pay attention to making money. Hard money lenders are interested in deals that have a good chance of making them money. Show how much money you could make by renting out the property or how much you could make by doing a “fix and flip.” If you show strong expected cash flow, the lender will be more confident in your ability to repay the loan. This could mean a lower interest rate.
Remember, how to get out of the situation. A well-thought-out exit strategy shows you know how the project will end and how you will repay the loan. A clear exit plan shows that you’re professional and lowers the lender’s risk, whether selling the house after repairs or getting long-term financing.
Tip 2: Improve Your Creditworthiness
In contrast to traditional lenders, a credit score is just one thing that matters when it comes to hard money loans. Keeping your credit score high can help you get a better interest rate.
The key is this. Don’t just look at the credit score. Hard money lenders are also interested in how much money you have in total. Here are some things you can do to make them more likely to give you credit:
Highlight Past Project Success. Show that you can successfully run real estate projects. Show case studies or sources that show you finished investments on time and made money when you sold them.
Showcase Strong Financial Reserves. Having a good financial cushion shows that you can handle any unplanned events that may come up during the project. Show that you have cash on hand or a strong line of credit to show that you are ready for any problems that might come up.
You can convince lenders that you’re a responsible borrower who deserves a lower interest rate by focusing on alternative credit measures that show how knowledgeable you are about real estate and managing your money.
Tip 3: Increase Your Down Payment
Do you remember the Loan-to-Value Ratio (LTV) we talked about earlier? This is an essential part of getting a lower hard money loan rate.
One way to figure out LTV is to compare the loan amount to the property’s estimated value. In this case, a 70% LTV means taking 70% of the property’s value and putting down 30%.
A smaller LTV is always the result of a more significant down payment. The lender is taking on less risk because they only finance a portion of the property’s worth. Lenders are more likely to give you a lower interest rate, fewer points, and even lower origination fees if your LTV is lower.
Here’s how to look at it: Putting more of your money into the project by making a more significant down payment shows that you are more committed to it and want it to succeed. This can help you get a better loan because it shows that you have more faith in your investment.
Tip 4: Shop Around and Negotiate Rates
Do not accept the first deal! Finding the right lender for your project to get a hard money loan would be best. This is why it’s essential to shop around:
Hard Money Lenders Are Not Created Equal. Each investor has a different level of comfort with risk and a specific area of expertise. Some may focus on certain types of properties or loan amounts. You can be sure you’re getting the best terms from a lender who knows the specific needs of your project by comparing rates from several lenders.
Now, let’s leverage negotiation to your advantage:
Become a comparison shopping pro. You can find a list of reliable hard money lenders online or by talking to other investors. Get quotes from different lenders during your first talks, including interest rates, points, and origination fees.
Negotiate like a pro. Feel free to talk prices once you have a few quotes. Here’s an essential plan: If you offer a shorter loan term, the interest rate should decrease. Lenders may be willing to accept a slightly lower rate if the loan terms are shorter. This is because they get their money back faster. This is a good idea because you’ll save money on interest and can finish your job faster.
You can get a hard money loan that fits your project’s needs and doesn’t cost too much if you compare rates carefully and negotiate wisely.
Tip 5: Consider a Bridge Loan or Private Lender
Hard money loans are a quick and open way to get money, but rates can be lower if you look into other options. You can choose between these two options:
Bridge Loans. These are short-term loans that banks and credit unions usually offer. They might be a good choice if you need money to “bridge the gap” between selling your home and buying a new one. If you have good credit, one of the perks could be lower interest rates compared to hard money loans. However, bridge loans usually have stricter standards for who can get them and shorter terms for paying them back.
Private money lenders. People or businesses with access to capital can lend it straight to investors. They use the value of the land as collateral, just like hard money lenders do. If you have a good credit history and deal, be fit, which may offer lower interest rates and more open loan terms than hard money lenders. On the other hand, private money lenders may be pickier about the people they give money to and may need a more significant down payment.
Remember that each way of getting money has pros and cons. Carefully consider your project’s needs, budget, and willingness to take risks before choosing your best choice.
Tip 6: Utilize Your Broker’s Expertise
Finding your way around the complicated world of hard money loans can be challenging. A good hard money loan company like CommercialConstructionLoans.net can also be beneficial.
To get the best hard money loan rates, CommercialConstructionLoans.net can help you do the following:
In-House Underwriting Expertise. Our team of experienced reviewers knows everything there is to know about hard money loans and can ensure that your loan application is as appealing to lenders as possible. They will ensure your application is properly put together, highlighting your strengths and easing any worries that might be raised.
Superbroker Network. CommercialConstructionLoans.net has an extensive network of hard money lenders nationwide. We can use this vast network to find lenders who are experts in your job type and the level of risk involved. We can get better rates and terms for you by accessing more possible lenders.
Think of CommercialConstructionLoans.net as your lawyer when it comes to hard money loans. We use our knowledge and contacts to save you time, help you get the best loan terms, and get you through complicated situations. Let us work hard while you focus on making your business real estate dreams come true.
Are you ready to discover how CommercialConstructionLoans.net can help you get the best deals on a hard money loan? Call (844) 690 6000 us right now!
Conclusion
You don’t have to accept sky-high interest rates when you get a hard money loan. By using these six special tips:
Make your deal structure stronger: Show a well-thought-out plan with a clear way out.
Improve your credit score: Draw attention to past project successes and considerable cash savings.
Make your down payment bigger: A lower LTV means less danger for the lender.
Compare prices and shop around: Compare offers and use tactics for negotiating.
Think about other options: Look into bridge loans or private lenders to see if you can get better rates.
Use your broker’s knowledge: CCL should look for the best options for you.
You can make it much more likely to get a hard money loan with the best terms possible. Remember that a strategic method is significant if you want to be successful.
Are you ready to see how hard money loans can help your business real estate project? Call Commercial Construction Loans (CCL) for a free evaluation. Our team of professionals is here to help you through the process and find the best hard money loan choices for your needs.
FAQs
What are hard money loans?
Real estate is the security for hard money loans and short-term loans. Real estate investors who require financing immediately but are not eligible for conventional bank loans frequently use them.
What are the benefits of hard money loans?
- Fast funding: Hard money loans can be funded in weeks, compared to traditional bank loans, which can take months.
- Flexible qualification requirements: Hard money lenders focus on the property’s collateral value rather than the borrower’s credit score.
- Can be used for a variety of purposes: Hard money loans can be used for a variety of purposes, such as purchasing investment properties, funding renovations, or financing flips.
What are the drawbacks of hard money loans?
- High interest rates: Hard money loans typically have higher rates than traditional bank loans.
- Points and origination fees: Hard money lenders may charge points and origination fees in addition to the interest rate.
- Shorter loan terms: Hard money loans are typically short-term loans with 12 to 24-month repayment terms.
How can I lower the interest rate on a hard money loan?
The tips outlined above can help you lower the interest rate on a hard money loan:
- Strengthen your deal structure with a well-defined plan and clear exit strategy.
- Improve your creditworthiness by highlighting past project success and substantial financial reserves.
- Increase your down payment to lower your LTV ratio.
- Shop around and compare rates from multiple hard money lenders. Negotiate terms like offering a shorter loan in exchange for a lower rate.
- Consider alternative financing options like bridge loans or private lenders.
- Utilize a hard money loan broker who can leverage their expertise and network to secure the best possible terms.
Is a hard money loan right for me?
Hard money loans can be a good option for real estate investors who need financing quickly and cannot qualify for traditional bank loans. However, the high interest rates and fees can make them expensive. Consider your project’s needs and financial situation before deciding whether a hard money loan suits you.