Often, getting the loans needed to buy property can be the most difficult part of the real estate closing process. After the economic crash of the late 2000s, changes in laws as well as changes in the policies and practices of major lenders have made it more difficult for people to procure loans.
Problems Getting Traditional Loans
The most obvious problem that many people have is a lack of credit. Unfortunately, the 2008 recession damaged many people’s credit. Even if you are employed and making money and paying bills on time today, a foreclosure or bankruptcy from years back can hamper your ability to get a loan.
In some cases, your credit may be fine but the bank may not want to lend money for other reasons. For example, traditional banks want to make sure that property appraises at whatever they are loaning, but the buyer may not have the same concern. For example, if a buyer is purchasing run-down property with the intent to fix it up and resell it, at the time of purchase the property may appraise very low (or have other problems such as code violations), making it currently worth less than what the buyer needs to borrow, and thus it may be difficult to get financing.
Hard Money Lending
One avenue that buyers can use if they have problems with traditional financing is what is known as hard money lending. This is lending by investors and lenders that are not traditional banks. Often these lenders are just people or small companies.
Hard money lenders may not be as concerned about your personal credit as banks are. Their biggest concern is the collateral you put up or mortgage. If you default on the loan, these lenders want to make sure that whatever property they get back from you has enough value to pay off what they let you borrow. Hard money lenders also may be able to approve your loan more quickly than a traditional bank.
Hard money lenders tend to look more closely at individual borrowers’ circumstances, as opposed to be being bound by corporate policies and procedures as big banks are. This can sometimes mean that these lenders can get borrowers approved much more quickly than traditional lenders.
Downsides of Hard Money
Hard money does come at a cost. These lenders usually charge a much higher interest rate than banks. Unlike the standard 30-year repayment term of a traditional loan, hard money lenders may have shorter periods, which can make payments higher.
Of course, because of the higher interest rates and shorter repayment terms, hard money loans may not make financial sense for people looking to buy property and rent it out at a profit.
Contact a real estate attorney at The Law Office of Agnes Rybar LLC to make sure that you are prepared for every contingency in the purchase of your New Jersey rental property.
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