5 Common Hard Money Loan Mistakes

5 Common Hard Money Loan Mistakes

Saving is great, but you can’t save your way out of a bad financial deal. Instead of trying to refinance your way out of an unfavorable mortgage, choosing the right lender from the start would be better. But with so many things to consider, how do you differentiate a golden ticket and a money pit?

Stick around till the end of this article to find out the 5 common hard money loan mistakes investors make. We’ll also highlight how to find a reliable hard money lender so your investment plan is foolproof.

5 Common Hard Money Loan Mistakes

Failing to Ask about Prepayment Fines

When people borrow money, they often get hung up on details like the repayment period and interest rates, and while these are important details, they’re not the only ones in the picture.

Many investors often forget or skim over sections that talk about prepayment fines.

Although hard money loans tend to be short-term, your financial situation can sometimes turn around faster than anticipated. Thus, you might want to clear your debt quicker so you don’t have it hanging over your head.

However, some lenders include penalties for early payment as it prevents them from earning on future interest. Hence, it would be best to ask about such terms before signing.

Not Establishing a Rapport with Your Lender

When you borrow from a hard money lender, it’s easy to view it as a simple business transaction and nothing more. However, establishing a rapport with your lender could be a great way to sign a better deal.

Unlike conventional mortgages, hard money loans are much more flexible, and you can negotiate your terms to your liking.

With that in mind, it’s much easier to come to more favorable terms when you’re on good terms with your private lender.

Besides striking a better deal, they can also speed up your funding time and advise you on the local market.

Committing to a Financial Contract without Pre-Approval

Another mistake investors tend to make is committing to a financial contract without pre-approval. It’s a misconception that pre-approvals are only helpful when applying for a traditional bank loan. On the contrary, they can also give a leg up on non-conventional financing.

Despite hard money loans having a higher approval rate, borrowers still outnumber lenders considerably.

However, pre-approval from a trusted company and proof of funds letter make your application more attractive to potential lenders. Besides, it gives you more assurance when you’re applying that you’ll get a confirmation and can seal the deal with the property you like.

Getting Hung up on the Interest Rate

While interest rates can be influential in telling you whether a deal is good or bad, you shouldn’t rely solely on them.

Sometimes lenders crash their interest rates to attract borrowers desperate for financial funding. However, it could be a trap to lure investors in and blindside them with other fines and charges that make your loan more expensive.

Thus, the best way to avoid such a scenario is to approach your options with a more holistic view.

Look at other factors like the prepayment rates, late fines, and further fine details that lenders use to drive their profits.

When you compare these metrics side by side, it’ll be easier to spot which deal is better, even if it has a higher interest rate.

Applying for a Loan without Knowing the Lender’s History

Before applying for a loan, it would be best to inquire about the lender in question.

Unfortunately, not all lenders are created equal; thus, some might look for cunning ways to scam you or worm unfavorable clauses into your deal. That’s why it’s essential to get referrals from people you trust.

It’s always best to start with people that work within the industry. Then, fellow investors, your real estate agent, or your property manager could give you recommendations to hit up or steer clear off.

You can also check online for reviews and experiences other borrowers had with your potential lender. The more information you have, the better your final choice will be.

Conclusion

There you have it! The top 5 common hard money loan mistakes to avoid.  Sticking with these valuable tips can save you a lot of unwanted drama.

Remember that interest rates aren’t everything, and you should make a holistic comparison with other metrics like prepayment penalties.

Also, establishing a rapport with your lender and getting pre-approval can help you negotiate better terms. Of course, building a relationship with a sketchy lender would do you no good, so ensure you perform your due diligence.

If you’re still concerned about picking the right lender, you should reach out to a professional property management company.

These experts often have experience with local contractors and financiers that could be useful in moving your business to the next step.

Fact Check

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