Real estate investors can turn to hard money loans when they need additional financing for flipping homes or building properties. The speed, flexibility, and security offered by hard money loans is what makes them appealing to many investors. If you’re interested in securing a hard money loan but don’t know where to start, don’t worry; we’ve got you covered. We’ll provide you all the information you need about hard money loans Connecticut and how you can secure one.
But first, what are hard money loans?
What is a Hard Money Loan?
A hard money loan is a short-term, non-conforming loan provided by private individuals and private companies. Hard money loans accept properties or assets as collateral, rather than the borrower’s credit.
Because hard money loans are provided by private investors and companies, they have more authority over the terms and conditions for approvals. This is the reason why it’s a lot faster to secure a hard money loan.
People usually turn to hard money loans Connecticut to avoid the lengthy process of getting their loan approved through traditional means. People also turn to hard money loans as an alternative solution for a denied loan or mortgage application.
If you’re interested in getting a hard money loan, below are some surefire ways you can do to secure one:
- Save Up for a Down Payment (and additional fees)
The down payment for a hard money loan is usually a lot bigger compared to the down payment you’d normally pay on a traditional mortgage. This is because the loan is only backed by the property involved.
The down payment for a hard money loan is usually calculated as the difference between the purchase price plus the budget and also 70% of the ARV.
For example, let’s say an investor wants to buy a real estate property for $00,000, but they only have a budget of $50,000. The investor expects the property’s after repair value or ARV to be at $300,000. To calculate the down payment, it would be at 70% ARV-purchase-budget:
($300,000 x 70%) = $210,000
$210,000 – $50,000 = $40,000 down payment
Remember that you also have to include property insurance, underwriting expenses, closing costs, and other fees. Be sure to have the capital needed to cover these expenses too.
- Establish An LLC
Let’s face it; real estate investment and house flipping can be a tricky business. Not all projects go smoothly and according to plan. There are a lot of unforeseen problems that can occur. Some of these issues usually start out small but end up getting very complicated very fast. To protect your personal assets and limit your risks, we’d advise you to set up an S-corp or an LLC for your real estate investment projects.
It’s also a lot easier to secure hard money loans Connecticut if you set up an LLC because a lot of hard money lenders will only lend to corporations and LLCS. Hard money lenders do not hand out consumer loans, so the only way to secure a loan from them is by working with an LLC. This way the loan is considered a ‘business transaction’.
Don’t worry about this step; setting up an LLC is pretty simple and won’t cost you a fortune.
- Find a Trustworthy, Local Hard Money Lender
One important thing that you should remember when seeking out hard money lenders is this: they are not all created equal. Remember hard money lenders are usually private individuals and businesses—they are not like banks or other regulated financial institutions.
When choosing a hard money lender, it’s important to consider the following factors first:
- Reputation –do they have a good reputation among other builders and house flippers in the area?
- Local –it’s recommended that you go for a local hard money lender. Why? Because they know the area and understand the costs of completing work in that area, which means they’re able to decide faster what terms they can offer you when it comes to financing your project.
- Speed –how fast are they able to finalize approval? How fast can you get the funds you need?
- Affordability –the interest rates for hard money loans is usually a lot higher compared to traditional loans. This is because they have shorter loan terms, but you can still look around for lenders with competitive rates and fees.
- Show Proof of Income
There is a lot less paperwork involved in hard money loans compared to traditional loans. This is due to the fact that the loan is not secured by your personal assets or credit. However, there are still some paperwork required and one of them will be your proof of income. After all, your lender needs to have an assurance that you are able to make the required monthly payments.
- Prepare A Repayment Plan
Hard money loans Connecticut have shorter terms, usually at about 12 months to 24 months, so you need to have a repayment plan prepared from the beginning.
The most common strategy borrowers use is to sell the property within the loan period. People use hard money loans for construction projects or for fix-and-flip projects, so all the investors have to do is to sell the property for profit once the project is completed.
If you have no plans to sell the property right away or are unable to sell the property immediately, you’ll have to work on getting a traditional, long-term loan to cover the expenses.
- Apply for the Loan
Applying for a hard money loan is quite easy! It is comparable to applying for a mortgage or a bank loan. The only difference is that there is little to no pre-qualifying involved. And the best part is that many hard money lenders have simple application processes online.
- Get an Attorney to Review the Paperwork
When you apply for a hard money loan, you’re borrowing money from a private individual or an organization. Thus, you may want to have an experienced attorney help you with reviewing paperwork and terms of the loan once you’re approved.
You should look for the following:
- All fees disclosed
- the repayment schedule included
- information on how much of the payment is applied to interest
