After 10 years of marriage, I’m still enjoying living in the first home I moved into with my husband. Buying a first home can be one of the most exciting events in a person’s life. Before making this important expenditure, people need to first sit down and determine how they will successfully finance it. After all, a home will likely be the most expensive purchase you make in your life. Talk to a loan officer and determine how much money you can reasonably borrow. Then, decide how much money you want to use as a down payment. You also must decide how many years you will finance your home for. On this blog, you will learn about the process of buying a first home with a loan.
Hard money lenders are private lenders who have a wad of cash that they want to lend out and charge interest on to make a profit. If you are interested in becoming a hard money lender, you will have to decide if you are investing in businesses or if you just want to stick to the private lending side of things. If you choose to stick to private lending only, then here are a few tips to get you started and help you continue to make money on the loans you lend.
1. Have a Sound Contract
Even though you are acting as a private lender, you still want a solid written contract. A verbal contract or a "spit and a handshake" contract will cause you to lose the shirt off your back when borrowers claim the money was never given or it was a gift. If you need to, hire a financial lawyer to draw up the contract with the clear rules and expectations for both you and your borrowers. These contracts are legally binding in the event of nonpayment or a disagreement.
2. Make Sure the Property That the Borrower Is Using to Secure the Loan Has Been Assessed
As a hard money lender, you only make loans based on the equity or value of the property that the borrower uses to get a loan from you. Be sure to have the property assessed by a professional to make sure you know exactly what the property is worth. Then you know if you can make the loan for the amount that the borrower is requesting.
For example, if the borrower puts up his or her house as collateral, asks for a loan for $75,000, and the house is worth only $100,000, this would not be a loan you could legally make. Recent changes to hard lender laws and regulations only allow loans up to seventy percent of the fair market value of property or equity, and in this example, the amount that the lender is requesting exceeds that seventy percent. If you did not have the property assessed before you made the loan, you could find yourself in some major legal trouble down the road.
3. Know Your Own Comfort Zone When Lending
Yes, you do make money as a hard money lender because you can command interest rates that institutional lenders cannot. However, you also have to lend money on gut instinct and numbers crunched. The borrower may not be asking for much, or they may not be sharing all the pertinent information with you that they should be. This is a shrewd business, and you have to be able to judge character well, trust your gut, and say no more often than yes. You want to keep the money you have while making money on the cash you lend, and the only way to do that is to know your own comfort zone when lending.