What Is a Direct Money Loan?
A direct money loan is different from a conventional mortgage. This type of loan is offered from hard lenders as a short-term financing solution when you want to invest in residential or commercial real estate ventures.
For instance, you find a great price on a residential single-family home that needs several repairs. You determine that if you rehab the home, you can make a profit off the investment. So, you apply for a hard money loan because you don’t need a long-term mortgage but only a short-term mortgage to give you the time to fix up and flip the home.
How Direct Money Lenders Differ from Conventional Lenders
With conventional financing, you have to provide all sorts of documentation, tax returns, and so on. The loan periods can range from 15 to 30 years. You are required to make regular monthly payments consisting of principal and interest.
With direct money lending, there is less documentation you need to provide. Getting approved is also easier compared to conventional mortgages. During the loan period, you are only required to pay the interest due for that month. You can if you choose also make principal payments, but they are not required.
Most loan periods for direct money loans are no less than six months and no longer than two years. Longer terms can be considered on a case-by-case basis. Another key difference is you can only borrow up to 80% LTV (Loan-to-Value) or 70% of ARV (After Repair Value).
You will need a down payment to cover the difference when the purchase price of the property is more than these amounts. Yet, if you and your real estate agent are skilled negotiators, you may not require a down payment if you can purchase the home for 80% or less of its LTV or 70% or less than its ARV.
What to Look for in Direct Money Lenders
There are some key features you should look for when shopping around for direct money lenders. These include:
1. Reputation – You want a hard money lender with a solid reputation. Be sure to check out the BBB, as well, to determine if there have been any complaints made against the lender.
2. Specialization – You want a hard money lender that specializes in hard money loans for the types of real estate properties you are investing in, such as single-family homes, condos, apartments, new subdivisions, commercial properties, etc.
3. Dependable – You want a hard money lender that is dependable and will be able to provide the funding when you need it. You should never have to wait to close a sale or miss out on a deal because the lender is still trying to finalize financing.
4. Decent Rates – You want a direct money lender who offers decent rates on your real estate loans. Generally speaking, interest rates should not be more than about five percentage points higher than conventional rates.
5. Low Default Rate – You want a hard money lender with a low default rate. This implies the lender has decent underwriting principles and business practices.
Now that you know what hard money loans are, the differences when compared to traditional loans, and what to look for in direct money lenders, you are set to start investing in real estate.
For further information about our hard money real estate loans or to apply for one, please feel free to get started online, or contact Sunset Equity at 866-291-3412 today!