Hard Money Guide
HARD MONEY GUIDE
When hearing “hard money loan” or the words “private money loan”, what is your initial thought?
In the past there have been some shady lenders that tarnished the industry of hard money lending when some predatory lenders attempted a ‘loan-to-own’ method that provided loans that were quite risky to borrowers who use real estate for collateral, which the intention was for the properties to be foreclosed. Fortunately, those dark alley lenders making sky-high interest loans are a thing of the past and do not exist in hard money lending today. However, there remains a certain residual stigma for real estate investors that have not used recent services of a reputable hard money lender.
Within this article, the basics will be covered regarding hard money loans, it includes:
What’s a Hard Money Loan?
In simple terms, hard money loans are short-term loans that are secured with real estate. Funds come from private investors, or fund of investors, rather than a conventional lender like a credit union or bank. Generally, terms average 12 months, but the loan term may be extended to a longer term of 2 to 5 years. Hard money loans require borrowers to make a monthly payment to cover just the interest, or interest plus a portion of the principle. At the end of the term, making a balloon payment is common.
When it comes to the overall amount that hard money lenders can lend a borrower is mainly based on the overall value of the subject property. Properties can include already owned property the borrower would like to use for collateral, or it could be a property being acquired by the borrower.
A hard money lender is mostly concerned with the property value, instead of credit score of the borrower. However, credit score remains a partial factor. A borrower that is not able to obtain a conventional loan because of recently foreclosing, or a short sale may still be able to obtain a hard money loan with a sufficient amount of equity in a property which is used for collateral. When banks tell you “No”, hard money lenders may tell you “Yes”.
Types of Property for Hard Money Loans
Borrower are able to obtain hard money loans on just about any property type, including single-family or multi-family residential property, commercial property, industrial property, even land.
There are some hard money lenders which will specialize in a certain type of property, such as residential, and be unable to provide land loans, just due to their lack of experience with the area. The majority of hard money lenders will have a certain loan niche that they are comfortable with. It is important to ask ahead of time which loan types they are able and willing to do.
Furthermore, there are many hard money lenders that refuse to make deals using owner-occupied residential property because of additional regulation and rules. However, there are some that do not mind wading through paper work. Any hard money lender will be willing to do loans in the 1st position, however there are less that are willing to do 2nd position loans because the risk to the lender is increased.
What Types of Situations Should Hard Money Loan Be Used For?
While hard money loans can be helpful, they are not the appropriate approach for all situations. When you are planning to purchase a primary residence, have good credit, an income history, and no problems such as foreclosure or short sale, the best approach for the borrower would be to use a conventional financing method with a bank, if there is time to go through the lengthy process of approval that banks require. However, when conventional financing through a bank is not an available option, or you need the loan in a shorter time period, hard money loans may be the appropriate approach.
The following are ideal situations for hard money loans:
- Land Loans
- House Flipping
- When borrower has issues with credit
- Construction Loans
- When real estate investors require fast action
Who Should Use Hard Money Loans?
Hard money loans are used by real estate investors for various reasons. However, the main reason behind using a hard money loan is the quick process of obtaining funds. It is common for hard money loans to have funds available within a week, compared to 30 to 45 days from a loan funded by a bank. The hard money loan application process usually takes one to two days, while some loans may be approved the same day. With a bank loan, you are lucky to hear back about the approval the same week.
Being able to obtain funds at a quicker rate compared to a traditional bank loan provides a large advantage for the real estate investor, especially as real estate investors attempt to acquire properties that have numerous competing bids. Therefore, a quick close using hard money loans can be used to obtain the attention of sellers, setting offers apart from other buyers using a slower conventional method.
Although, another popular reason for investors using hard money loans is that a bank has rejected their application for a conventional loan. Because things do not always happen as planned, things in the past can prevent banks from approving a loan, including foreclosures, short sales, and credit problems. Also, banks require an income history. If the borrower has recently obtained a new job, this may cause banks to deny a loan request simply because f insufficient income history. The bank does not focus as much on a health income amount, as they do the income history. However, a hard money lender is able to assist with a loan without stressing over these areas, long as loans are repaid and the equity value of the property is enough.
Hard Money Loan Interest Rates and Points
When it comes to the interest rates and points that hard money lenders charge, it varies between lenders and region. For instance, a hard money lender located in California will often have a lower rate than lenders located in other areas of the country, because there are many hard money lenders in California. Due to an increase in competition, prices decrease.
Compared to a conventional bank loan, hard money lenders have a higher risk rate when loaning funds. Because of this increased risk, hard money loans tend to have a higher interest rate than your conventional loans. A hard money loan can have an interest rate ranging between 10% to 15%, depending on the lender and their risk in lending the funds. Meanwhile, points may range between 2% and 4% of total loan amount. Based on loan to value ratios, the interest rates and points can greatly vary.
Loan to Value Ratio of Hard Money Loans
For a hard money lender to determine the amount they are able to lend, they use a ratio of loan amount, which is divided by property value. Thus, the term loan to value (LTV). It is common for many hard money lenders to offer between 65% and 75% of the current property value. However, there are some lenders willing to lend based on the after repair value (ARV), where by estimating property value after improvements are made. From the perspective of hard money lenders, this increases the risk as the amount of capital the lender puts in, will decrease the capital investment of the borrower. Because of the higher risk involved, hard money lenders will have a higher interest rate.
Also, some hard money lenders are willing to lend a higher percentage of the after repair value, or finance the cost of rehab. From the borrower’s perspective, this may sound great, but due to the higher risk involved, they have a much higher interest rate and points. For this type of loan, you can expect an interest rate between 15% and 18% and 5 to 6 points when lenders fun a loan with a small to no down payment from borrowers. Although, there are situations where it will be worthwhile for a borrower to pay the exorbitant rates to secure deals if they are able to generate a profit on the project.
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Hard Money Loan Borrower Requirements
As previously discussed, the main concern of hard money lenders is the equity amount a borrower invests within a property being used as collateral. The credit rating of a borrower and credit problems such as foreclosures or short sales can be over-looked by hard money lenders, long as the borrower has enough capital to pay the loans interest.
In addition, hard money lenders have to take the borrowers plan of the property into consideration. Borrowers have to present reasonable plans showcasing their overall plan for the property, and how the intend to pay the loan off. Generally, this includes making improvements on the property, then reselling it, or obtaining a long-term financing option later.
Locating Hard Money Lenders
There are various ways that you can go about locating a reputable hard money lender in your area. An easy method for finding a local hard money lender is using Google to search for the following: [your area] and “hard money lenders”. The search results will provide individual companies, along with a list of various hard money lenders that others have complied. This provides many lenders to start contacting, then evaluate the ones of interest.
In addition, you can locate hard money lenders by attending a local real estate investor club meeting. Most cities have these club meetings, and hard money lenders tend to attend in search of networking with potential borrowers. However, if there are no hard money lenders at the meeting you may ask other real estate investors if they can recommend a hard money lender. You may find that conventional mortgage brokers, real estate brokers, or other real estate professionals can refer experienced hard money lenders. You can see which hard money lenders are most recommended by leveraging your current network.
Hard Money Loans in Arizona
In Arizona the most experienced and trusted hard money lender is Brad Loans by eMortgage. For over 40 years our real estate and hard money lending experience has made us the expert in the Phoenix Valley. We fund both owner occupant hard money loans and real estate investment loans that are common for fix and flip projects. Our team can help you purchase a property or refinance a property you already have purchased. Borrowers with no credit or bad credit are accepted and we can loan up to 100% loan to value with cross collateral. If you are in Arizona and are looking for a hard money loan to purchase a property, look no further than Brad Loans. To apply for a hard money loan please fill out our loan application form.
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