Hard money loans are a great option for people looking to flip a property, expand their investment portfolio quickly through real estate and grow a business. They are also accessible to people who may have less than ideal credit history or who just haven’t been in the game long enough to secure a traditional loan from a bank.

 

One of the biggest advantages to a hard money loan is speed: unlike a traditional loan which could take months to be approved, hard money loans can be secured in as little as a week. This speed makes a huge difference in a competitive real estate market that has sellers ready for buyers with money on hand.

 

Hard money loans are based on the value of collateral, typically the property itself. This means that if the borrower defaults on the loan, the lender takes the property. This, and the higher interest rate, is a measure lenders take to protect themselves from losing to a borrower who doesn’t have the money to pay for the loan. 

 

If you are looking at hard money loans as an option for your next investment, here are six common financial mistakes that hard money investors make and how you can avoid them. 

• Not getting prequalified

It doesn’t matter what kind of loan you are looking at, you should never commit to an investment without being prequalified. Unfortunately, there are still people who make this mistake. People who sign contracts while waiting on their loan to be approved risk losing the property or losing a lot of money.

 

Fortunately, hard money loans are much easier to be approved for than traditional loans. Instead of taking a deep dive into your credit history, your lender will want to know more about your investment, or property, and how you plan on paying off the loan.

• Not working with a trusted lender

Your relationship with your lender is important, so make sure you have done some research and are confident that you are working with a good one. Just like hard money lenders need ways of trusting you, you need to make sure that your lender is someone you can trust and build a relationship with. This could save you headaches and cash down the road.

 

The importance of relationships can be lost when you are accustomed to working with banks who review your financial history and hand you your loan. Your lender’s familiarity with your project can set you up for success, not to mention their understanding of the market could land you better investments.

• Worrying about the interest

One common “red flag” of hard money lending is the high interest rate. While this can look like a drawback at first, it shouldn’t be a reason you don’t go forward with your hard money loan.

 

Consider the advantages of a hard money loan:

• The loan can be granted much faster than a traditional loan
• Your loan period can be tailored
• You can secure it even with a short or patchy financial history
• Your credit will be less affected

 

Instead of worrying about the higher interest rate, which is unavoidable, smart hard money investors consider this amount as part of their costs and budget accordingly, so they really aren’t losing anything. You may also find that you save money in the long run given the shorter loan period. 

• Not knowing exactly how much they need 

When you are financing a property or project, it is essential that you know exactly how much money you will need before you get started. This can be tricky due to unexpected repairs or costs, but getting closer to that number can save you a lot of money. Taking out more money than you need can make it harder for you to pay back the loan. On the flip side, not taking out enough can stall your project or force you to pour in money from your cash reserves. Your lender should be able to advise you in this process, and if you are working with a contractor, consider getting a second option to avoid those unexpected repairs.

• Not making a detailed plan

This is not the time to take out a loan and figure out what to do with the money later (although there is hardly ever a time that we can say that that’s a good idea). Your lender needs to protect their business from bad deals, so they need to see that you have a solid plan for how you will use the money and how you will pay off the loan. Not having a good plan for your loan could be a reason that your loan is denied before you even get started. Before you go to your lender, talk with all involved parties, from realtors and contractors to other investors, to make sure everyone is on the same page about how much the investment will cost and how long the project should take.

• Not making payments on time

We can’t understate the importance of a good plan. Having a good plan for paying your loan will help you avoid pitfalls like not making payments on time, which is, unfortunately, a common money management mistake. Following loan best practices such as setting up automatic payments and only taking out what you can afford will help you make your payments in a timely manner and save you from losing your property.

We can help you avoid these mistakes every step of the way at JMJ Funding. Contact us now to see how we can help with your hard money loan, from start to finish.