Real estate investors choose to use difficult money for many different reasons. The main reason is the difficult money lender’s ability to finance the loan quickly.
In most situations, difficult money loans can be financed within a week. Compare that with the 30 to 45 days it takes to get a bank loan financed. The process of applying for a loan of money usually takes one or two days and, in some cases, a loan can be approved the same day. May you be lucky to hear the approval of a loan from your bank in the same week!
The ability to obtain financing at a much faster rate than a bank loan is a significant advantage for a real estate investor. Especially when the real estate investor is trying to acquire a property with many competitive offers, a quick closing with a difficult money loan will attract the attention of the seller and differentiate his offer from the rest of the buyers that offer slow conventional financing.
Another reason why a borrower may choose to use a difficult money loan is that the banks have rejected it for a conventional loan. Short sales, foreclosures, credit problems, these are all things that happen. Another important thing that banks should see is the income history.
If a potential borrower recently started a new job, the bank may deny the loan application due to an insufficient income history, even if the borrower obtains a healthy income.
The money lenders can look beyond these problems as long as the loan is paid and the borrower has sufficient capital invested in the property.
Interest Rates and Points for Difficult Money Loans
The representative Annual Percentage Rate (APR) is the interest rate charged for the entire year. The APR measures the cost of borrowing money from a specific institution, as well as any other associated costs.
Institutions vary in terms of their transaction fees, interest rate structures and late penalties, so it is useful when you need to compare different loans. Each institution includes its own annual percentage rate; therefore, you must meticulously evaluate each one and choose the best option.
The interest rates and points charged by difficult or residential bridge loan lenders will vary from lender to lender and will also vary from region to region. For example, hard money lenders in California generally have lower rates than other parts of the country, since California has many money lenders. The increase in competition leads to a decrease in prices.
The hard money lenders take more risks with their loans compared to a conventional bank loan . Because of this increased risk involved in a difficult money loan, the interest rates for a difficult money loan will be higher than conventional loans.
The interest rates for hard money loans range between 10 and 15% depending on the specific lender and the perceived risk of the loan. The points can range between 2 and 4% of the total amount borrowed. Interest rates and points can vary greatly depending on the loan to value ratio.
The hard money lenders are mainly concerned about the amount of capital that the borrower has invested in the property that will be used as collateral. They are less concerned about the credit rating of the borrower.
Problems in the borrower’s record, such as a foreclosure or short sale, can be overlooked if the borrower has the capital to pay the interest on the loan.
The difficult money lender should also consider the borrower’s plan for the property. The borrower must present a reasonable plan that shows how they intend to repay the loan as a last resort. Typically, this improves the property and sells it or obtains long-term financing later.