USING A HARD MONEY LOAN FOR BUSINESS

If your business does not qualify for a traditional business loan but you are needing funding. a hard money loan may be an option open to you as they are an alternative, non-traditional source of small business financing. Read on to learn more.

What Are Hard Money Loans?

Hard money loans are short term loans that are secured by real estate. They are often funded by private investors instead of conventional lenders like credit unions or banks. The terms are for about 12 months but they may be extended to 2 to 5 years. The loan does require monthly payments of interest or some principal and interest with a balloon payment at the end of the loan. The amount that you can borrow is based on the value of the property. The property has to be one that you already own and wishes to use as collateral or it could be the property that you are trying to buy. Hard money lenders are mainly worried about the property value instead of your credit, although credit scores are still important to lenders. Those who can’t get a conventional loan because of a short sale or foreclosure can get a hard money loan if they have plenty of equity in the property being used. When a bank says no, a hard money lender may say yes.

Interest Rates and Points For a Hard Money Loan

The financing costs and focuses charged by hard money loan specialists will shift from bank to moneylender and will likewise fluctuate from district to locale. For instance, hard money loan specialists in California by and large have bring down rates than different parts of the nation since California has numerous hard money loaning firms. Expanded rivalry prompts an abatement in costs. Hard money moneylenders go out on a limb with their loans contrasted with an ordinary bank advance. Because of this higher hazard required on a hard money loan, the financing costs for a hard money advance will be higher than typical mortgages. Financing costs for hard money advances extend from 10 – 15% relying upon the particular moneylender and the apparent danger of the loan. Focuses can go somewhere in the range of 2 – 4% of the aggregate sum loaned. The financing costs and focuses may shift significantly contingent upon the loan to esteem proportion.

Hard Money Loan to Value Ratios

The credit sum the hard cash bank can loan is controlled by the proportion of advance sum isolated by the estimation of property. This is known as the credit to esteem (LTV). Numerous hard cash moneylenders will loan up to 65 – 75% of the present estimation of the property. A few loan specialists will loan in light of the after repair esteem (ARV) which is the evaluated estimation of the property after the borrower has enhanced the property. This makes a less secure credit from the hard cash moneylender’s point of view, in light of the fact that the measure of capital put in by the loan specialist increments and the measure of capital contributed by the borrower diminishes. This expanded hazard will make the hard cash loan specialist charge a higher financing cost. There are some hard cash loan specialists who will loan a high level of the ARV and will even back the recovery costs. This may sound incredible from the borrower’s perspective in the first place, however these sorts of credits have a substantially higher hazard included and the loan fee and focuses will be MUCH higher. Expect 15 – 18% intrigue and 5 – 6 focuses when a bank finances an advance with practically zero up front installment from the borrower. Sometimes, it might be advantageous for the borrower to pay these over the top rates with a specific end goal to secure the arrangement in the event that they can in any case produce benefit from the venture.

Borrower Requirements for Hard Money Loans

As talked about before, hard cash moneylenders are principally worried about the measure of value the borrower has put resources into the property that will be utilized as guarantee. They are less worried about the borrower’s FICO score. Issues on a borrower’s record, for example, an abandonment or short deal can be disregarded if the borrower has the money to pay the enthusiasm on the advance. The hard cash loan specialist should likewise consider the borrower’s arrangement for the property. The borrower must present a sensible arrangement that shows how they plan to at last result the credit. Generally, this is enhancing the property and offering it or acquiring long haul financing later on.

USES FOR A HARD MONEY LOAN IN 2020

Hard money loans are a type of loan that is usually not issued by a bank but by a private money source. Hard money loans can be very helpful in short term investments or real estate endeavours. They are usually know for their fast funding, higher interest rates and no hassle quick loan approvals. If the interest rates are higher, you would think people would not want to get a hard money loan right? That’s false, below are 6 reasons to use hard money loans when you can’t get financing from bank or other lenders.

Hard Money Loan Uses Include:

1. Ultra Fast Funding: Sometimes the perfect real estate opportunity comes up at the drop of a dime and you don’t have time to wait for a bank loan. When bidding on a property you are going to need either cash or hard money lending in place of that cash. You don’t want to miss a profitable opportunity when it comes.
2. Fix & Flip or Rehab Properties: Banks usually wont fund fix and flip or rehab properties because they pose too much risk. Often the most profitable real estate opportunities require repairs, cosmetic rehab and past due maintenance. The only way to make these costly repairs quickly and easily is to either have the cash or be funded by a hard money or private money lender.
3. No Credit or Bad Credit: Do you have no credit or bad credit and want a traditional bank loan? Good luck! Banks don’t want to lend you money unless you have some already to cover the loan just in case you can’t pay it back. Now, if you had the money you would of already funded the project yourself right? Of course you would but you don’t and that why hard money lenders are your saving grace! The don’t care about credit as long as you have equity or collateral for the loan. Even people with a bankruptcy or foreclosure on their credit history can still get hard money loans.
4. Construction Loans: Whether you’re a home owner or contractor and planning on building your dream home, building a four plex, borrowing to finish and unfinished home, remodeling your existing home or building a 5 spec home, hard money loans can help at any stage of construction to help you get these projects completed when bank won’t fund your construction loan.
5. Unable to Get Traditional Bank Loans: Traditional lenders have very tough criteria to meet in order to receive a loan. Traditional banks usually won’t offer loans for: People with bad or no credit, fix and flip opportunities, finishing or building new construction or buying or purchasing land. Hard money lenders will fund all of these endeavors and more.
6. Land Loans: There are many different forms of land including Raw Land, Developed Land and more. From a single lot of land to a subdivision. If your land is surrounded by commercial buildings or other houses you will find a hard money lender much easier. This will give the Land lender good insight about the value of the property.

DEFAULTING ON A HARD MONEY LOAN

The source of hard money is private individuals who want high interest returns on their cash loans. Investors utilize these loans to purchase properties that banks do not normally offer loans on. The loans often carry interest rates in excess of twelve percent, however.

Loan Structure

The entire property is used by hard money lenders as collateral. Usually only sixty to seventy perent of the after rapair value of the property us covered by the hard money loan. The borrower would come up with the balance.

Terms

With interest rates ranging from twelve to eighteen percent, these loans are high interest but over fifteen to thirty years still have a baloon paument usually after the first or second year. At just 6 percent interest the montly payment over 30 years on a $100k loan is just $599.55 but trade that for a an interest rate of fifteen percent andit cleaps to $1,264,44. You can also expect  to pay between two and four points on the loan as well.

Default

Hard-money loan contracts typically contain a default interest rate clause that significantly raises the interest rate in case of default. For example, the rate may jump from 15 percent to 29 percent in some states, sending the monthly payment from $1,264.44 to $2,417.11, which could make it impossible for a small-business owner to cure the deficiency.

Foreclosure

Hard-money lenders are quick to foreclose when the borrower fails to cure the loan. Since the entire property was used as collateral, any portion of the loan amount that was paid back is forfeit. For example, if a business owner paid back $50,000 of a $65,000 loan, he lost the entire $50,000 paid.

Deed In Lieu

Hard-money lenders can offer a deed in lieu of foreclosure, which allows the borrower to give back the property and avoid foreclosure. The advantage is that no foreclosure appears on the business owner’s credit report or in the public records that would negatively affect her ability to get future loans. Business owners must be sure the lender will agree to sign a release of lien at the same time. Otherwise, the borrower remains responsible for paying back the loan even though the property was given back to the lender.

Source: https://smallbusiness.chron.com/happens-default-hardmoney-loan-61461.html

HARD MONEY LOAN VERSUS ALL CASH OFFERS

Real estate investors, people with questionable credit and those needing a transitional bridge loan often use hard money loans for financing. Offered by investment groups, they need an equity investment greater than commercial loans but they are easier to obtain.

Offers

A seller faced with either an all-cash offer or one backed by hard money needs verification of funds from the all-cash buyer. This comes in the form of bank statements showing the money is currently in the bank, and has been for a period of time. A hard-money offer must be stated in the purchase contract’s financing section, and is accompanied by the lender’s preapproval letter. Both types of purchases usually give the seller a short closing window.

Financing

A hard-money loan is subject to a finance contingency, and an appraisal is done to verify that the property is worth the amount being borrowed. While a hard-money lender requires a substantial down payment, the lender still must verify the property’s existence and value. An all-cash offer has no appraisal attached, unless it’s at the request of the buyer, but the appraisal won’t affect the sale unless the buyer writes into the contract that the property must appraise at, or above the purchase price.

Costs

Hard-money loans are issued at rates above those of commercial loans. Their terms are anywhere from a few months to several years, but seldom are they for the long term. Fees are greater than those charged by commercial lenders. The most important borrowing criterion for a hard-money loan is the amount of equity the borrower is investing — hard-money lenders may require up to 35 percent down. Hard-money loans do not rely on the borrower’s credit standing for approval. Cash buyers do not face these conditions because they are using their own funds.

Source: https://homeguides.sfgate.com/hardmoney-loan-vs-cash-offer-81598.html

RESIDENTIAL HARD MONEY LENDING

In real estate financing, “residential hard money” is a non bank loan on a property. Other names used for this inclide bridge loans, no doc loans and private loans. In the case of a residential hard money loan, the assets of the borrowers are given overall consideration and be used as a form of collateral. One big advantage is this kind of loan can close in just three or four days.

Where A Residiential Hard Money Loan Can Help

• Loans with multiple items of collateral.
• There is insufficent time for other loans to process.
• Non US citizens.
• Avoiding foreclosure.
• The need for a stated loan.
• Borrowers who need rapid closing on the loan.
• The repositioning of property.
• Borrowers who need almost immediate funds from their rental property.
• Borrowers whose credit has been damaged.

PAYING OFF YOUR HARD MONEY LOAN

Utilize Proceeds From Selling The Property

This is a favored strategy for those who fix and flip homes. The hard money loan gives investors an opportunity to purchase properties very quickly and after making improvements, the investor sells the property for considerably more than what they paid for it, enabling them to make a profit and pay off the loan. It will take good planning and developed skills of investment for this to work as well as finding a buyer with the right potential during the hard money loan period.

Go To A Different Loan

When you are not looking for a fast sale, a standard conventional mortgage may be a better option – the downside is the approval process takes far longer to complete – whereas a hard money loan can help an investor buy a property very quickly, allowing them the time to think about further options before moving forward.

Use Cash From A Different Source

You can pay off the loan by using cash from another source. It has to be said this is often the option of last resort when plans did not pan out as expected and it can calso cause disruption in the investors other business operations. Nonetheless, it can give the investor time to get a return on the property. Exit strategies are vital for any kind of loan and hard money loans are no exception to this.

CAN’T PAY BACK HARD MONEY LOAN

Hard money lending is often a great answer for real estate investors that need cash in a hurry and with a variety of terms and payment schedules. While many lenders understand borrower’s specific situations, they also need to protect investment, which means acting correctly when a borrower defaults on an outstanding loan. When you take out a hard money loan, you need to understand the terms and conditions of the loan fully.

Default Reasons

Missed Payment – Due to the short-term nature of a hard money loan, a simple missed payment could be all that’s required for the lender to call the loan as due.
Missed Balloon Payment – Nearly all hard money loans come with a balloon payment that is much larger than the individual monthly payments and is due at the end of the agreement. Generally, the borrower is able to make this payment due to the sale of the investment property, but if they can’t for whatever reason, the lender may foreclose on the property.
Changing Conditions – Depending on the terms that the loan was originated with, different financial conditions on the part of the borrower can be enough to convince the lender that they need to call the loan due immediately, rather than later. This process isn’t as arbitrary as it sounds, but if the loan is called legally and you’re unable to pay, it can be cause for default.
Deterioration – If the condition of the investment property deteriorates to a level below a threshold deemed acceptable, the lender may foreclose on the property or ask for an advance of funds.
Illegal Transfer – Some contracts stipulate that the borrower must keep the property in his name. Unauthorized transfer of the property could result in a default of the loan as well, along with certain penalties.

What Happens if I Default On My Loan?

Due to the truncated nature of hard money loans, the average lender may choose to call the loan quicker than average traditional lenders, but there are still a few steps before total foreclosure.
For starters, a default or missed payment may cause the lender to increase the interest rate on the loan substantially; in some cases, even up to double. Hard money loans have interest rates that are much higher than average loans – they usually begin at 12% and go up from there – so a default can increase it to 25-30%, or even higher. A payment of $1500 can go up to $3000 or even higher, making it nearly impossible for the borrower to make the bill current. If it stays in default, the lender may choose to move on to more drastic measures.
A foreclosure occurs when the bill is called due and the borrower is unable to pay. In this event, the borrower will most likely decide to sell the collateral and keep all of the current payments as a penalty for loan default. If the borrower is close to the end of the life of the loan, this could mean several thousand dollars that are simply lost. In most cases, hard money lenders do not report a default to credit bureaus due to the cost, but they may choose to do that as well. Another option for the borrower is called “deed in lieu of foreclosure.” If the lender accepts, the borrower may give the property back to the lender instead of having a foreclosure appear on their record. Too many foreclosures can affect the borrower’s ability to secure a traditional loan in the future, although borrowing from another hard money lender may be an option. If the borrower pursues a deed in lieu of foreclosure, they must gain a release from the lender, or they could be on the hook for the property and the loan as well.

Source: wpengine, By: “What Happens If a Borrower Doesn’t Pay Back The Hard Money Loan.” Delancey Street, 23 Feb. 2018, https://www.delanceystreet.com/what-happens-if-a-borrower-doesnt-pay-the-hard-money-lender-back/