Three Options for Paying Back Your Hard Money Loan
When you apply for a hard money loan you’ll be asked what your “exit strategy” is. What that means is simply, how do you plan to pay back the money you borrowed? In this blog, we’ll explore some of your options.
- Use the income you make from selling the property to pay off the loan. This strategy is ideal for fix and flip loans where the investor often purchases the property for a much lower price, fixes it and then sells it for a pretty profit. Hard money lending is perfect in this situation because it will provide the investor access to fast funding. The faster the transaction and flip, the less interest the investor pays and the more money they walk away with.
- This is often the strategy used for income/rental properties. Again, hard money loans are ideal because they provide the investor the quick funding needed to purchase when the right opportunity presents itself. The refinance option also allows the investor time to transfer the hard money loan/short term loan after they’ve lined alternative, long-term financing often from a traditional lender.
- Alternative Source. You might choose to use funds from another sale, investment, or even hard money loan. This often an investor’s fallback plan because it alters the course of funds from its original, intended use. It does however; buy the investor more time to find the right buyer or even more time to further the income potential on an investment.
Having an exit strategy is important. Ideally the investor wants to be able to cover the cost of the loan using the profits from the real estate deal. Experience, careful planning and matching the right exit strategy with each unique real estate transaction will help investors be more successful. Contact us to apply for funding or to speak to a hard money lending expert today.
Step One, Improve Your Credit Score
In order to obtain financing or a hard money loan for your real estate project your credit score will be taken into consideration. While it’s not the only factor or the most heavily weighted when it comes to approval or denial, it is still an important step to take on your way to achieving financial freedom and setting yourself up for long term financial success. First, let’s look at the breakdown of credit score ranges and what is typically considered good, fair, poor and bad credit.
- Excellent Credit: 750+
- Good Credit: 700-749
- Fair Credit: 650-699
- Poor Credit: 600-649
- Bad Credit: below 600
Everyone is entitled to one complimentary report per year from each of the three major creditors. Obtain these each year and make sure there are no discrepancies. If there are, you can dispute them with each creditor. Things to look for include:
- All personal information is correct
- The report reflects all your credit accounts
- Look for missing or late payments that you believe were to have been made on time
- Look for accounts or applications for credit you don’t recognize
- Look for outdated items (a decade or more ago) that still appear on your report
Next it can be helpful to determine what areas of you need to improve upon. For example, if you have a habit of making late payments, set up payment alerts or reminders for each month. Lack of diversity can also cause a lower credit score. Many lenders want to see you can accommodate more than just credit card debt. This is where having (and paying on time) a car payment or mortgage can actually help you.
If you do have debt, stop moving it around and start paying it off. Some experts even suggest that you use your negotiation skills. For example, contact the debt collector and ask if they would be willing to hold off on reporting the debt to each major credit bureau in exchange for full payment. (Get the agreement in writing.)
Limit individual store cards. Sure it’s tempting to save an additional 10 – 20% on your purchase by applying for a Macy’s card but skip this as your credit takes a hit with every application whether you’re approved or not.
Another thing to limit is the amount of debt to limit ratio. Don’t allow the debt on your card to exceed 30% of your credit card limit. This can hurt your credit score even if you make payments in full and on time every month. One strategy to overcome this is to make an additional payment any time you feel you might exceed 30% of the allotted limit.
Your credit score is just one of many factors in obtaining a hard money loan and getting your start on the pathway to financial freedom through real estate investing. If you are seeking additional advice or would like to speak to a lending expert, please contact us.