Hard money is simply the capital financing available outside of the traditional lending means such as the credit unions and banks. Therefore, a hard money loan is a form of a private loan that is primarily secured for asset-based projects, mainly by the real estate investors.
An investor quickly acquires a loan so as to purchase, renovate, or refinance a project; the property can then be sold to finance the debt. It is not just as easy as it sounds; the borrower must understand the suitability of the loan before applying for one. Since this kind of loan does not have the complexities of traditional lending because you may borrow urgent cash Loans online anytime, it is very tempting to go this way without understanding what you are getting yourself into and later regret it.
In this article, you will get the necessary information about hard money loans and whether registration is mandatory or not.
a. Where do the hard money lenders get the money to lend?
Hard money lenders are private groups or individuals with enough available capital to lend within specific geographical locations with certain defined thresholds like reasonable equity on the property. They run private lending businesses to seek more return on their investment that in the traditional belts of the lending industry.
b. How do the hard money lending and the banks or credit unions compare?
These lenders are very different from conventional lenders in the market. Other than the fact that they both lend and at interest, the rest of the other factors such as approval time, application paperwork, assessment of the creditworthiness, income inquiry is very diverse.
Hard money lenders do give loans without following any hard-wired procedures or policies, unlike the banks and unions. Their average approval period is less than a week, for banks, you will be lucky to hear from them in less than 30 days. These flexibilities make hard money a sweet pie until when their 8-point interest rates are compared to 1-point rates from the banks.
Hard money loans are pegged on the equity of the owner in the property provided as collateral as their security, the property could be land, commercial buildings, real estate development, etc., banks, on the other hand, give loans if and only if you have a good credit score, have a good income flow and have an excellent collateral base
c. Is it mandatory for a hard money lender to be registered?
Just like any other business operator, regardless of industry, be it financial, manufacturing, or processing, as long you are in business, and you must be licensed. Registration helps the government to regulate the companies and also as a tool to protect the consumers. Therefore, if you want to become a private money lender, look for an attorney and obtain your license.
Contrary to the opinion of many, these private lenders are always bound to the law regulations pertaining the kind of business transactions they carry out, it is the interest rate that is not regulated, and the reason is that the loans they offer are very risky since they don’t pin their approval on the availability of a credit history or a good income by the borrower. The only security they have of their investment is the owner’s equity in the property being used as collateral.
Read More: Five Ways to Get a Start-up Loan
d. How can one become a hard money lender?
Sometimes people who are in private lending businesses for long do decide to start up their hard money lending business. So, what do you need for you to become a hard money lender?
i. Business title.
Ensure you obtain your insurance title to cover you from the risk of fraud and forgery. This title, when presented after suffering a loss, you will be indemnified back to your previous position.
ii. Business registration
Get yourself an attorney to take you through the process of obtaining necessary documents to legalize your business. In case you begin your lending business without registration, you run the risk of being closed down and your already pending loans invalidated, hence suffering significant losses.
Hard money lending is a significant investment, so you need a considerable capital backup initially; this is to cater for the initial costs as well as lending. So before a repayment comes through, you should be prepared to shoulder the business on your own account.
e. Valuation of collateral.
Drive the comps yourself’; this is the popular mantra among hard money lenders. This simply implies that you should never take the faces on the photographs for their face value. You should go and make the valuation on your own to ascertain the real value of the property being used as collateral.
You have to keep in mind that collateral mitigates the risk of investment in a field without any backup evidence that you will receive your payment back.
Ensure you have some other things to compare with the appraisal so that you don’t miss a detail on the real worth of the property.
Depending on the kind of loan you want to specialize in, some investments do need advance financing.
The following are such situations where a borrower needs an advance loan.
- When the borrower needs funds to fight a court battle to prevent bankruptcy.
- When the borrower is late on property taxes and needs to settle the taxes in time,
- In an event where the property requires renovation before its value on the market is ascertained.
- When a foreclosure happens.
The Bottom Line
Hard money lending is a form of private lending, as much as the interests on the loans are dangerously high, the loans themselves are convenient in instances where you need instant financing for a property, or you have placed a deal which is to be paid by hard loans. In such a case, a bid is trusted more than the bid to be paid for from conventional lenders.
It is apparent from this article that a private lending business such as this one should and must conform to the regulations of a state. And therefore, registration is a provision they must comply with.