Successful real estate investors understand the beauty of hard money loans. The hard money lender provides quicker access to much-needed cash to finance real estate deals with less stringent approval processes. Conventional mortgages are hard to come by, with a lot of scrutiny and red-tape before your loan gets approved.

If you have a bad credit score or need instant access to ready cash, hard money loans are the perfect alternative. However, a lack of proper risk assessment can leave you in a debt hole. As a savvy real estate investor, here are five common pitfalls that you can easily avoid.

1. Not Waiting for Pre-Qualification

Far too often, real estate investors get ahead of themselves, accepting offers before getting the loan approved. The fear of missing out on a sweet fix and flip deal may have them committing to a contract without first consulting the hard money loan lender. It can be humiliating and stressful to have the private money lender throw out your application after you sign on a deal. The lender may provide you with a proof of funds letter after loan approval.

2. Being Unsure of How Much Money to Borrow

Another common mistake is the lack of financial planning when applying for a loan. Not knowing how much to borrow can have you repaying a huge loan within a short timespan or lose out on a deal due to insufficient funds. Hard money loans typically require a 30%-40% down payment, with the full amount being due at the end of the loan period. You may need to draft an exit strategy to help you repay the funds or risk losing the property.

3. Providing Incorrect or Insufficient Information During Application

It can be tempting to embellish your financial health in the hope of achieving quicker loan approval. Hard money lenders in California may request a wide array of personalized and financial information while filing the application papers. The financier will then conduct a background check, and any irregularity may raise a red flag. You wouldn’t want to miss out on a deal because a few documents that the lender requested by you did not provide.

4. Not Reading the Fine Print

Real estate investors often skim through the loan contract, signing on a document they do not fully understand. You may need to be cognizant of the terms that you agree to. Take time to go through the document, and if possible, have an attorney have a look at it. Certain clauses such as prepayment penalties and interest rates can come to bite you later on.

5. Failing to Research the Hard Money Lender

Not all lenders are equal. You may need to take time and research the hard money loans provider. Find a financier that you can build a long-term relationship as you grow your real estate portfolio. What do past clients say about them? How long have they been in business? Which sectors do they specialize in? Asking these questions may provide an idea if the lender is the right fit for your business.

Hard money loans are an excellent alternative to traditional banking routes. You may need to conduct due diligence before signing the agreement to avoid falling into such pitfalls. Are you interested in a private money loan in Sacramento, CA? ARC Private Lending is a hard money lender that provides loans for asset-based financing deals.