Are Hard Money Loans Safe?
Because the private money lending industry is largely unregulated, people ask, “Are hard money loans safe?”
Today I’m going to try and answer that question for you and some more.
- Are Hard Money Lenders predatory?
- Can a hard money loan go bad and get me in trouble?
- What are the loan scams out there that I should avoid?
Those are the three most common questions that go along with the bigger question which is, “Are hard money loans safe?” Here are a few red flags to look out for to determine if your Hard Money Loan is safe.
The first question you want to ask yourself when getting a hard money loan is:
- “How do you know this lender?” That’s a huge question.
- Did you find this lender online?
- Was this lender referred to you from someone that you know?
Avoid Bait and Switch Lenders.
Now, if you want a safe Hard Money Loan, don’t get involved with a predatory or “bait and switch” type of lender.
A hard money lender should be referred to you by someone that you know that has closed a loan with them before. If you find a lender online, and you don’t know anyone that’s ever closed a loan with that lender before, that’s going to require you to do a lot more homework, a lot more due diligence on that lender.
Do your due diligence on a lender like you would do on an investment property that you want to purchase. Before the loan closing, make sure you read the loan documents that the lender is going to have you sign at the loan closing.
Read the loan documentation
For example, the promissory note, the mortgage document, or deed of trust. Whatever documents the lender is going to have you sign as part of the loan, read the documents in great detail and study those documents prior to closing on the loan and signing those documents.
- What are the late fees?
- What are the default clauses, or default penalties, in the note or the mortgage document?
And then, what will happen if the loan comes due and you don’t pay the loan off by the time that it’s due? Are they going to charge you a 5% “maturity penalty”?
For example, if you don’t pay the loan off by the maturity or due date? Are they charging 5%? I mean, if it’s a $100,000 dollar loan, that’s a $5,000 penalty.
So make sure you know what the loan documents say before you close on a loan with a hard money lender. And why? Because if you get yourself in a bad loan, that is certainly not a safe place to be.
What’s Your Payback Plan?
And then finally the third question that you want to ask yourself to determine if this hard money loan is safe or not is, “What’s your plan for paying that loan back?”
Do you have one? Because I’m going to tell you, a really unsafe place to be, is in a hard money loan for which you don’t have an “exit strategy,” or a way to pay it back.
Know what your exit strategy is, for the hard money loan, before you get into it.
- How are you going to pay that loan back?
- Is it a refinance?
- Are you going to sell the property?
Are you getting liquidation of an asset over here that you’re going to use to pay this loan off? Have multiple exit strategies and know how you’re going to pay that loan back before you get into it.
Did this video answer your question about, “Are hard money loans safe?” If it did, please like this video and share it with someone you know that may have the same questions.
A lot of people, they’ve never done a hard money before, so they have a lot of these types of questions.
Questions like, “Are Hard Money Loan safe?” Share this video with them, like it, and if you have any questions, leave them in the comments section below.
This is Corey Dutton. I’m a private money lender. Thanks for watching!