Hard money loans are an appealing finance option for real estate investors and developers because they’re quick to be approved and have flexible terms.
If you’re considering applying for a hard money loan, you’ll need to know the terminology before you get started so you can make decisions. Here are X terms you should be aware of before you take out this loan type.
Loan to Value (LTV) Ratio
LTV ratio is the percentage of the property value that a lender will lend. For example, if a property is worth £200,000 and the lender is offering an LTV of 70%, you can borrow £140,000. A lower LTV means the lender has less risk, but you’ll need to fund more upfront.
After Repair Value (ARV)
The ARV is the value of the property after renovations or improvements are done. This is important for you and the lender as it essentially determines the profitability of the project. Your lender will use ARV to work out how much they can lend and how much equity you have in the deal.
Points
Points are upfront fees charged by the lender, which are calculated as a percentage of the loan amount. For example, 2 points on a £100,000 loan would be £2,000. These fees are for the lender to lend the money, and you’ll usually pay them at closing.
Interest-Only Payments
Generally, the way that payments work for hard money loans is that you’ll pay interest-only payments during the loan term, with the principal due at the end. This reduces your monthly payments, which can be helpful if you have a tight cash flow during a project. But the final repayment can be big, so you’ll need to budget properly and plan ahead.
Bridge Loan
A bridge loan is a short-term finance solution that covers immediate your needs while you’re waiting for long-term finance or the sale of a property. Bridge loans are generally classed as hard money loans.
Prepayment Penalty
Some hard money loans have a prepayment penalty, which is a fee if you pay off the loan before the end of the term. This penalty exists so the lender can get some of the interest they would have earned over the full loan term. Make sure you review the terms for prepayment penalties while you’re considering a loan so you don’t end up with a nasty surprise.
Collateral
Collateral is whatever asset you use to secure the loan, usually the property you’re purchasing or renovating. If you default on the loan, the lender can take the collateral to recover their funds. You’ll need to make sure that the value of the collateral matches the loan amount to reduce your risk.
Loan Term
A loan term is the length of time that you’re borrowing the loan for. Loan terms for hard money loans are shorter than traditional loans, usually 6 months to a few years. This makes them ideal for if you’re planning a project with a quick turnaround, like flipping a property.
Takeaway
Now you know what these terms mean, you’re all set to confidently consider your options for hard money loans. Whichever lender you choose, make sure they have plenty of positive reviews, and read the lending terms carefully before you commit.
