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Things to Watch for When Shopping for a Hard Money Loan

There are some things that you will want to watch for as you are shopping for a Hard Money Loan:


How many points do they charge?

Points are a fee that a lender charges as a cost for them to do a loan. A point is equal to 1% of the loan amount. The number of points a hard moneylender charges will differ from one lender to the next. They can be anywhere from two points all the way up to ten points. If the lender is charging too many points, it can mean that the cost of the money is too great. Although some may charge a lot of points, some of them will allow the seller to pay the points. Ask the hard money lender about their restrictions on how much they will allow the seller to pay in closing costs.


Is there a prepayment penalty?

A prepayment penalty is a fee that a lender will charge if a loan is paid off early. The penalty fee usually amounts to about six months of interest on the loan. Just because a loan does have a prepayment penalty charge does not mean it does not make sense for you; just allow enough room on the deal so that you have enough to cover the penalty without sacrificing your profit. Not all loans have this fee; some hard money lenders will charge the prepayment penalty and others will not. It is obviously in your best interest financially to try to find one that doesn’t charge the penalty.


What is the term of the loan?

Hard Money Loans are short-term loans, and can even be as short as six months. You would use this type of financing if you were planning on quickly flipping or refinancing the property. If you are working with a hard money lender who will only work a six month loan, you will want to make sure that you will be able to sell the property within that period of time, or locate another financial resource to refinance if needed.


How much of the ARV will they finance?

It is important to find out how much of the After Repair Value (ARV) a lender will finance. The After Repair Value (ARV) is the value of the property after it has been repaired. Most lenders will finance anywhere from 60-70% of the After Repair Value (ARV).