Hard money loans are a great way to get the necessary financing for real estate investments. If you don’t have a large amount of cash available or you don’t want to tie up 100% of your liquid funds, hard money loans provide an alternative method of funding that traditional loans typically won’t provide.
Everyone wants to know, though, what are the interest rates? Aren’t interest rates on hard money loans high?
That’s a myth that has been perpetuated in recent years. Is there interest? Of course, every borrower pays interest, but hard money loans are short-term loans that provide the immediate financing you need to close on an investment property, so the interest is often worth it and again, short-term.
The Average Rates
Today, hard money loan rates range from 9.25 to 11.25%. They also often have points or fees that offset the administrative costs. One point equals one percent of the loan amount. A reliable Hard money lender will usually charge an origination fee between 1.25 – 1.75% percent on most loans.
While it sounds high, remember what these loans do – they help you grow your real estate investment portfolio. Without the hard money loan, you either need all cash or to qualify for traditional financing, which is often much harder than hard money loans.
What Affects Your Hard Money Loans?
Just like a traditional loan, hard money lenders look at your risk of default. They want to know that you’re going to make good on the loan. Since requirements are different for hard money loans, it helps to know what lenders look for.
Your Own Investment
You’ll likely be able to borrow up to 75% of the home’s purchase price or after-repair value (depending on the lender). This means you need your own investment and the more money you have the higher your chances of approval become.
The more money you put down, the less risk the lender takes on. Take two borrowers for example – if one borrows with a 50 percent deposit and another borrows with a 25 percent deposit – they are both good borrowers, but the borrower with a 50 percent down payment poses a smaller risk of defaulting and may get better interest rates as a result.
Experience As A Real Estate Investor
Since you’re borrowing money to buy a home you aren’t going to live in, lenders take a big risk by granting you the funds. If you run into financial difficulty, your investment property payments are likely the first thing to go. You aren’t going to risk losing the house you live in, after all.
If you have experience as a real estate investor, it bodes well for lenders. They often give the investor’s background in real estate more stake than your credit history. If you’re looking to fix and flip, for example, lenders think of investors with experience as less of a risk than those doing it for the first time.
A Strong Credit History
Bottom Line
If you’re looking to invest in real estate, it’s essential to present yourself as a strong candidate to hard money lenders. While some believe that credit scores and financial history don’t matter to these lenders, the truth is—they do. Your creditworthiness, experience in real estate, and personal investment in the project all play a significant role in your ability to secure funding. Lenders want to work with borrowers who demonstrate financial responsibility, a track record of success, and commitment to the deal.
The more strengths you bring to the table, the better your chances of securing a lower interest rate. Consider how long you plan to hold the property and factor the interest into your overall carrying costs. When you include it in your financial projections, interest becomes just another part of doing business—less of a burden, and more of a strategic expense that all real estate investors will face.
