When it comes to alternative real estate financing, hard money loans are a popular option. Hard money financing offers investors quick access to short-term funds.
But, hard money loans have their own set of risks. These loans are issued by alternative or private money lenders. Investors need to understand that private lenders are not banks. There are many fake private lenders involved in scams.
How can you choose a reliable hard money lender? Here are some scams you need to watch out for:
Loan Approval Without Property Evaluation
Before approving a hard money loan, a legitimate lender will either conduct a physical inspection of an investment property or perform an in-depth assessment of an investor’s loan application details.
Since hard money financing is riskier than a traditional bank loan, hard money lenders won’t approve loans without doing their own homework.
Request For An Upfront Fee
If your hard money lender asks for an upfront fee, something is just not right.
Fake lenders usually ask borrowers to pay a high upfront fee before funding the loan. They may give these fees any other name, such as administrative fees, underwriting fees, travel fees or due diligence fees.
While hard money lenders do charge service fees, you should beware any lender who charges heavy upfront fees before closing.
Provision of 100 % Funding
Some fake lenders will promise 100 percent financing on a real estate property in exchange for the payment of a high fee. Keep in mind, majority of real lenders will only provide 60-65 percent funding of the collateral’s value. If you feel that a hard money lender is making outrageous claims, trust your gut.
Excessively Low Interest Rates
Due to the short-term nature of hard money loans, they have interest rates higher than bank’s rates. In most cases, hard money interest rates range from 12 percent to 18 percent. However, if the rates are lower than 10 percent, it may be a major red sign. Honest lenders will clearly inform borrowers their rates.
Some tips for choosing a reliable hard money lender
- Ask a hard money lender for client references. Speak with these clients about their experience with the lender.
- Conduct proper research on the lender online. Check out their website and customer reviews.
- Have a personal meeting with the lender. An honest lender will be willing to provide the information you require.
- Inquire about the loans they have closed. They should be able to demonstrate a solid track record.
Seeking hard money loans from smart, trusted and responsible lenders in Massachusetts? At Harper Financial, we specialize in an array of alternative real estate financing in Massachusetts.
We offer customized hard money solutions that caters to every investor’s unique financial needs and objectives.
For further information, feel free to contact us anytime.