Many buyers are turning to rehabbing houses in this heavy seller’s market because they can sell easily – and ideally at marginally above market rates.
It’s a smart way to get the most money out of each bargain you find. Wholesaling is great, but if your offers are small, you’ll want to get the most value out of each one. For more information, visit their website at Texas hard money lenders
Here are some of the words that could appear in these loan deals, and it’s critical that you consider what they mean and how they impact your project’s financing.
Interest: This one is fairly self-explanatory; it’s the fee you pay for using the money for a certain period of time.
Points: A premium paid at the start of the loan as part of the loan’s rate. One percent of the loan is represented by each point. As a result, a $100,000 loan at 3 points equals a $3,000 fee. At the start of the loan, all points are won in full. To put it another way, unlike interest, points are not calculated based on the length of time you have had the loan. The fee is the same if you keep the loan for a month or a year.
Consider this: if the debt will be outstanding for longer than a year, it is preferable to pay an extra percent of interest rather than an extra point.
Loan Size: Lenders use Loan-To-Value (LTV) ratios to determine the overall loan amount. The majority of hard money lenders (HMLs) would lend between 65 and 75 percent of the property’s valuation. They usually use the After Repair Value (ARV) rather than the actual market value or sales price.
However, a recent trend for HML is to use these percentages as well: % of Sales Price and % of Rehab. For eg, they can claim that they will lend 90% of the purchase price and 100% of the rehab costs up to a total ARV of 75%. This means they will never lend more than 75% of the ARV, but even though the LTV is less than that, they will also need you to contribute a portion of the Purchase Price and Rehab Costs.
Prepayment Charge: Check to see if the loan has a prepayment penalty, which is a fee that the provider applies to the payout sum if the loan is paid off by a certain date. This penalty is often only extended for the first three months of the loan, which is normally appropriate for a rehab project. Other lenders charge a premium if you don’t pay on the due date. It’s a devious way for them to collect fees.
Prepaid Interest: Certain HML ask you to open an escrow account and pay a portion of the interest upfront. In most cases, none of the escrow funds will be applied to the real annual interest charges. That’s just a security deposit for the lender, and you’ll have it back after you pay off the debt.
The period of time before the loan is due is referred to as the loan term. The average length of a rehab loan is one year or less. A lender may sell a six-month loan with an automatic three-month extension for a fee. It’s important and understand the loan’s term and ensure that it blends with the rehab strategy.