Real estate investing is one of the most popular methods for building lasting wealth and generating additional income. However, when it comes to securing capital for real estate investments, it can present a challenge. Investors need to know the basics of obtaining a real estate investment loan to ensure the success of their venture.
It’s important to note that there are many lenders out there, and borrowers do not have to go through a large traditional bank lender. Hard money loans are used in real estate transactions to great success. However, before jumping into your next real estate investment opportunity, it is useful to know what will be expected. Below, we have provided a brief overview of what to expect when securing a loan for a real estate investment.
Substantial Down Payment
Many lenders will require a large down payment on real estate investments ranging from 15-30%. They need a larger down payment on an investment property than a primary residence because lenders want to know that the borrower has “skin in the game.” By owning more equity in the property, the borrower is taking on more of the risk than the lender. Local lenders are often more flexible in this area than large financial institutions.
For most borrowers, saving for a 15% or more for a down payment on a property will take a while. Finding a lender that will offer you a reasonable deal can be critical to the success of your investment.
Debt-to-Income Ratio
Lenders will look at your debt-to-income ratio to help inform their rates and their decisions. This ratio is helpful for lenders. It assures that the loan payments will continue to be serviced in the event of a property vacancy. Lenders want to know that if your property goes vacant, the debt will still be covered from money from the borrower’s pocket.
In addition, most lenders will expect that borrowers have six months of cash set aside to cover the debt payments of the property. Many traditional lenders will also check your credit score and take that into account when underwriting the loan terms. These lenders consider their capital to be invested in the property and the borrower. This mindset explains why they perform a thorough vetting process of the borrower.
Hard Money Loans
A hard money lender differs from conventional bank lenders because they do not vet the borrower as heavily. Instead, hard money lenders use the value of the property to back the loan instead of the financial history of the borrower. Most hard money lenders still perform a credit and background check of the borrower. This is because there is a higher level of associated risk in the loan terms. This structure creates options for those that want to take advantage of a promising real estate opportunity but may not meet the requirements of conventional lenders.
Since the value for hard money lenders lies in the asset, not the borrower, they are a terrific option for real estate investors looking for quick turnaround times on their investment. Those that are interested in quick resales or fix-and-flips can find the ease and speed of hard money loans advantageous.
Whether you are looking into buy-and-hold or fix-and-flip, the chances are that you will be financing a portion of the purchase of the property. Here at Park Place Finance, we offer hard money loans that help borrowers reach their goals, whatever those are. Contact us today to get started on securing capital for your next real estate investment.