New Jersey Hard Money Loans: Important Things You Need to Know

By: Sumeet_Manhas

A hard money loan is a different type of mortgage loan that can be observed in real estate investing. It differs from traditional loans because private money lenders and individuals serve as hard money lenders. They offer loans to real estate investors. Just like other types of investing, there are pros and cons to New Jersey hard money loans. They are best suited for certain investment scenarios, but for you to determine if this type of loan is best for you, you should understand how hard money loans work.

New Jersey Hard Money Loans: How are they structured?

Private lenders who deal with hard money lending aren’t regulated by the Federal Reserve as banks are, the practices can be significantly different. Many times, terms, fees, rates, and other procedures for private money loans depend on the lenders’ preferences, and whether or not they can participate in a given investment venture.

Therefore, you must always do your research with lenders in your area to be sure that your calculations are correct. How do hard money loans work in New Jersey? The following information will help you determine if this type of loan will fit your needs.

Terms of hard money loans

Typically, New Jersey hard money loans are short-term loans that need to be paid back within six months. This is perfect for real estate investors who deal in short-term investments, who can quickly renovate and turn their properties for a profit.

The terms for New Jersey hard money loans can go anywhere from a few months to a few years. However, they make the most sense in scenarios where investors only need to hold on to the property for a short period. Some hard money mortgage loans can include a balloon payment, which means that the loan principal will have to be paid in full at the end of the term.

But if you’re unable to repay the loan in full, you will need to re-finance the loan or simply pay the penalties. Since the property itself is the collateral in hard money loans, the lender can take over its ownership if you default.

Interest rates for hard money loans

Most hard money loans have high-interest rates, unlike traditional loans. Typically, hard money loan rates are around 7 to 15 percent, which Is double or even triple a regular bank loan.

This is usually the case because real estate investment can be high-risk. In addition to that, most hard money lenders don’t need the same level of arduous vetting as traditional lenders, which makes this type of loan more accessible to those who don’t have good credit.

Hard money loan points

Hard money loan points are an origination fee that hard money lenders charge to cover loan initiations, administrative fees, costs, and other expenses associated with the mortgage. They can also be used to prevent the risk of the lender. They are calculated on a percentage basis.

Usually, one point is equivalent to 1 percent of the total loan amount. Hard money loan points can range from 2 to 10 percent, depending on the borrower and the lender’s unique situation. Points are customarily paid by the borrower as soon as the loan is initiated as part of the closing expenses.

New Jersey Hard Money Loans: Down payment requirements

Just like a conventional mortgage, a lot of hard money lenders require the borrower to invest some of their money in the property, in the form of a down payment. The amount can vary, but a hard money lender generally requires an investor to pay at least 10 percent of the appraised value of the property. These are calculated based on the property’s loan-to-value ratio.

For instance, if you need to buy a property appraised at a hundred thousand dollars, a hard money lender can offer a 90% LTV ratio. This means that the loan size would be ninety thousand dollars, and you will be responsible for the remaining ten thousand dollars as a down payment.

Some hard money lenders, however, apply the after-repair value of the property instead of the purchase price when calculating the LTV. This benefits the borrower when he doesn’t have the cash to fund the necessary property renovations. But then, in many cases when a lender uses the ARV, they employ higher points and interest rates to make up for the increased risk.

Not all hard money lenders will ask for a down payment. Some will just finance 100 percent of the purchase price. However, this type of agreement may come with higher fees and interest rates, unless the borrower is an expert, proven to make profits, and can responsibly handle hard money business loans.

When do you need to use a hard money lender?

If you’re still uncertain whether or not New Jersey hard money loans work, the answer is sometimes. Hard money loans can help open the door for borrowers who want to get started in real estate investing. After all, they are great for first-time investors in other situations, like those who have poor credit.

One benefit of working with hard money lenders is that the process is fast. Conventional mortgage loans can take one month, or even more. Private investors can offer buyers funding in less than 7 days. The ability to access financing this quick can be a competitive advantage in the market, especially if there are many bids on a property, and you needed to impress them with an all-cash offer.

Hard money lenders also give a point of entry to real estate for borrowers who have poor credit and have been rejected by banks. Because the property serves as collateral in this type of financing, hard money lenders are most likely going to look past a sullied financial history.

Ultimately, hard money loans can be more cost-efficient once you have become established in real estate investing to use conventional financing. You need to focus on repairing or building your business and personal credit score if you want to qualify for this lending option.

By Sumeet Manhas

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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