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What Are Points On A Hard Money Loan?

What Are Points On A Hard Money Loan

What Are Points On A Hard Money Loan

If you’re searching the question “What Are Points On A Hard Money Loan?” you are looking for a better understanding of the inner workings of the hard money lending process.  This post is made to help you better understand what points are and how they related to hard money lending.

Fee Based Income on Hard Money Loans

In addition to interest, a hard money loan has other fees charged by the lender. These fees are a source of income for the hard money loan lenders, therefore it is important to fully understand the income sources of lenders so you have a fair negotiation process, which is how you will obtain the best term and rates.

Points:

A percentage of the total loan amount is calculated. One point equals one percent of a loan. Depending on the lender, some hard money lenders will charge points to simplify the closing costs without providing details of separate underwriting fees, or others. Also, some lenders will charge additional points besides these fees. The charged amount will depend on transactions and agreements between the involved parties, risk, complexity and loan-to-value (LTV).

Example:

You have a $500,000 loan, and you are charged 3 points (3%), totally $15,000. These points are often referred to as ‘up front’ points since they are included in closing costs and get disbursed during the tart of your hard money loan, rather than being collected over the span of the loan. However, there are situations when hard money lenders might agree to pay referral fees to another hard money lender for sending you or private investors. Furthermore, lenders might agree on sharing part of the points collected with private investors.

Possible example of up front point distribution:

-$4,000 to private investor for increasing yields

-$3,000 to referring hard money broker

-$8,000 to hard money lender

Underwriting Fees and Other Fees

These fees get charged to you as an additional cost that increase the points of a hard money loan. With private lenders, some will charge them, others will not. Although certain fees just ‘pass through’ hard money lenders, including credit report fees and appraisal fees, others are additional compensation sources.

Example:

Underwriting Fees – This is a flat fee, generally ranging between $750 to $2,500 and is charged to hard money loans. Overall price depends on the complexity. There are cases where this fee gets incorporated in the points charged, but it could also be charged as a separate addition.

Processing Fees – This is a flat rate that is charged for the processing of a loan.

Doc Prep Fees – This is a flat rate charged for the loan document preparation. There are cases when these fees are simply passing through due to hard money lenders using private companies or creating documents, while other times the fee will be a source of additional income for the PML.

Referral Fees

This is an agreed loan percentage or dollar amount between the referred business and hard money lender. If you got referred to the hard money lender, it is likely that referral fees are part of the fees you will be paying to the lender. Because of specialized nature behind private money lending, every hard money lender is not able to provide ‘all things to all clients’. The funds they lend get decided on by investors that they represent. Thus, referral fees are a common factor.

Loan Servicing

This is a fee paid by the investor to a PML, if they are servicing the loan. A PML will retrieve your payment, maintains all required records, then provides you an applicable report. The servicing fee varies; some may be a flat rate while others charge a percentage of a loan balance. For example, 0.25% to 1% of original loan, which is calculated annually and collected monthly.

Late Fees

Another source of income hard money lenders collect are late fees, which occur if you make payments after the specified date within your promissory note. Late fees are often split with an investor (50/50), this is paid upon you paying the fee.

Foreclosure Fees

This fee is generated when a foreclosure occurs, sometimes being paid to a hard money lender, but not always. There are various PML that offer foreclosure services, thus act as a source of profit revenue or hard money lending companies. However, there are other situations where hard money lenders outsource the entire foreclosure service, and do not collect any revenue from foreclosure fees. Usually, this type of income does not get split with investors.

Renewal Fees

This is a fee that you pay for renewing your current loan with mutual consent from a private investor. Investors will likely be willing to renew your loan if you are a quality borrower who pays on time. This maintains their funds earned. Renewal frees are commonly paid by the borrower, either up front or as additional cost to the loan principal.

Each hard money lender has a business structure slightly different than another. The profit revenue may come from a single source, or a combination of the above sources. Keep in mind that nothing is set in stone, and fees of a hard money loan can be negotiated.

By having a better understanding of fees in association with a hard money loan, you will be able to negotiate a better rate for your loan. You can improve negotiation position by having a great track record, low LTV and high collateral, which can result in a much lower cost.

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Phoenix Valley Hard Money Lending

If you’re looking for a hard money loan in the Phoenix Valley, Brad Loans can help.  We finance both investors and owner occupant purchases with up to 100% loan to value with cross collateral.  That means you could get a loan with little to nothing down with the right combination of collateral.  Brad Loans has helped thousands of Arizona residents get the money they need for fix and flips, bridge loans, home purchases, or other real estate endeavors. To learn more about what Brad Loans can do for you fill out a hard money loan application or give us a call at 480-948-0880.

Hard Money Guide

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.

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.

For more information please call 480-948-0880.

Private money lending in an IRA

Private money lending in an IRA

If you’re searching “Private money lending in an IRA” we have the knowledge and experience you need.  When you use an IRA to invest within a private loan or hard money loan, it is a great strategy to enhance your returns.

HARD MONEY LENDING

The term IRA is used loosely when it comes to referring to any type of retirement account such as the standard IRA, SEP-IRA, 401K, Roth IRA, Money Purchase Plan and the Defined Benefit Plan. There are a lot of legal differences in retirement accounts, but when it comes to the purposes of hard money lending as well as private money lending, they will be lumped together as one for an easier reference. Since various states will use different security instruments for loans, the generic reference of note or mortgage shouldn’t be interpreted to mean trust deed, mortgage, land contract, or promissory note.

Many people honestly believe that funds that are in IRA’s are limited to only investments in bonds and stocks. That just isn’t true. IRA’s are able to be invested in various alternative investments like private placements, mortgages, limited partnerships, real estate, and just about any other type of investment that you can think of. The key is to be able to use a special custodian, like Pensco Trust Company, that will manage and properly account for your transactions. The custodians handing of alternative investments are normally referred to as self-directed IRA custodians and are a great way to make hard money loans or private loans.

We will now begin to explore note investing in your IRA by considering a simple case: Bob investor makes a $100,000 interest only loan to Mr. Barker at 6% interest and originates the loan using his self-directed IRA. For it being our first case, we should assume that Mr. Barker pays each loan payment on time and pays the loan off before 5 years.

Life is great for Mr. Barker and Bob private investor. Mr. Barker gets a private loan that he may not have gotten and Bob investor enjoys 6% tax deferred income in his IRA.

So, how would you make this simple hard money loan using IRA funds? It isn’t very different than getting a mortgage from your traditional checking account. Simply, follow the six steps below:

Open Self-Directed Retirement Account

Most of us are used to using the big brokerage houses as our custodian for our retirement savings. But, it is those firms that will only permit investors to invest in publicly trader securities and personal loans are not an option. There are plenty of companies that do specialize in self-directed investments which allow you to move into an area that is referred to as alternative investments.

Properly Vest a note for Hard Money Loans

When it comes to traditional transactions, your note may be vested in your name or the name of your company, but in a self-directed IRA there is normally more details when it comes to vesting the note. An example of this we will reference the custodian and the account number and IRA holder:

XYZ Custodian Company, FBO “Bob Investor IRA Account #098765”.

Sign all agreements which will authorize your custodian to fund the note.

The Custodian will then have pre-established procedures that you will need to follow and most will have a form agreement for you to sign. Brokers that specialize in private money lending will be glad to help you. This particular agreement will authorize the custodian to release the funds. Many custodians will also have a checklist that you can use to ensure that you will cover each step as the loan begins.

Close the transaction.

Most investors will use an escrow, attorney, or title company to close the transaction. Select the right party that has worked with a self-directed custodian and your life will be so much easier.

Send Copies of the security agreement to your custodian.

Once the note has been funded, the IRA custodian will need to keep the actual promissory note and recorded security instrument such as a mortgage, deed of trust, etc. This is very similar to the conventional IRA brokerage holding on to your stock certificate.

Get with a servicer to send payments to your custodian.

Many investors will use a third-party loan servicer in order to collect payments from the borrower. The servicer will then have an authorization agreement which will state who the payments are sent to.

AVOIDING HARD MONEY LENDING

Even though it is nice to think that all borrowers will pay on their mortgages as reliably as Mr. Barker does, it is normally not the case. Believe it or not, note private investing will get more complicated when the borrower does not pay on time and then there are more problems that are particular to retirement accounts that will make note investing very risky if you do not know what to look for.

Hard Money Advances

There are plenty of times when an investor needs to have advanced funds against their mortgage. An advance happens to be a payment of funds by the private investor for something that should have been paid for by the borrower, or for services that are needed to collect collateral. One advance example happens to be insurance. The borrower’s home insurance may lapse and in order to protect your note, you will need to advance to renew the policy or advance in order to force place insurance from a specialty insurance company.  Delinquent property taxes are another good example when it comes to advancing may be needed on a private loan.

When it comes to traditional loan investment, there is an issue when it comes to advancing funds which is coming up with the advanced funds. With a self-directed retirement account, you will first need to figure out how you will get the money into the IRA before you are able to advance it. If you have already maxed out the contribution to your IRA you may not be able to get an advance.

Advances can be large. Consider a foreclosed home from a hard money loan, that upon possession needs $50,000 to remodel it to get it to fair market value for the property, or you can consider bankruptcy that will last for several years and will require the advance of thousands of dollars in Sheriff or trustee and attorney fees.

Make notes that you are not allowed to pay for any type of IRA owned asset or IRA expenses personally, as this is considered prohibited transactions such as being considered self-dealing with your IRA. You will need to remedy for the shortfall of funds on your IRA which would be to transfer funds from any other IRA that you might have at another institution or to rollover funds from another qualified pension account.

If those solutions do not work, there are other types of alternatives. The Department of Labor, which governs over retirement accounts has recently issues some guidelines that will enable you to make a loan to your IRA. The loan may be made to your IRA, if it is interest free, unsecured, and provided that it is:

  1. A) For the payment of any ordinary operating expenses, or
  2. B) For the purpose of incidentals to the operation of the IRA.

If the loan is supposed to be for longer than 60 days, then the documentation for the loan must be created and then signed prior to the expiration of the 60 day period.  Loans cannot be used to increase your purchasing power of your IRA. Take for example, you are not able to loan your IRA $100,000 to purchase another property.

PROHIBITED TRANSACTIONS

When it comes to using an IRA to invest in real estate or notes, it is vital to avoid completing a prohibited transaction. It is this type of transaction that is improper use of your retirement account by you, your beneficiary, or any other disqualified person. A disqualified person is your fiduciary or members of your family such as your spouse, a lineal descendant and any spouse of a lineal descendant.

The below examples are prohibited transactions with the traditional IRA:

  • Selling property to it
  • Using it as security for a loan
  • Borrowing money from it, except as outlined within this article
  • Purchasing property for personal use for future or present with IRA funds
  • Receiving any type of unreasonable compensation for managing the IRA funds

Essentially, you will need to conduct your business with any unrelated third parties. So you would not want to make a loan to a stranger, then hire your spouse to service the loan. You would not want to hire your brother to do your taxes for a certain fee charged to the IRA. You must be very careful. The prohibited transactions are not always obvious. You should consult the attorney, a CPA, or your custodian that is well versed in these types of transactions before you are able to experiment on your own. There are several self-directed custodian companies that will be able to maintain a directory of professionals that will specialize in these areas and will be a lot of help.

If the IRS determines that you have conducted a prohibited transaction, your whole IRA may then be disqualified and subjected to substantial fines, taxes and penalties.

UNRELATED BUSINESS TAXABLE INCOME (UBTI)

Unrelated business taxable income is normally defined as the gross income that comes from any unrelated business or trade that is normally carried out by an exempt organization. The tax that is on the UBTI is called the UBIT or Unrelated Business Income Tax.

Most of the time, UBTI will come into play when there is debt involved in a real estate transaction. Take for example if your IRA purchases a home for $100,000nd you use $30,000 of the IRA funds and borrow $70,000. Even though the transaction is fine to do with an IRA, the IRS will not allow you to benefit from the whole income of the property. You may only benefit from the income as it relates to the IRA funded part which would be $30,000. This means that you would be paying 70% tax on the investment income and income of the property if there is any and then receive tax-deferred benefit from your IRA of 30%. The debt financed portion is known as the Unrelated Debt Financed Income or UDFI.

Many people truly believe that the UBTI is not permitted within your IRA. It is actually permitted. You will have to be completely aware of it and ensure that your tax accountant files that right form (IRS 990 T form). If you are investing in a partnership that happens to be purchasing mortgage notes or real estate, you should be very careful that you know exactly how the partnership is planning to use the leverage, if at all. The use of leverage in the partnership, if it is not properly documented and treated may then create unintended UBTI which is potentially subjected to large penalties and fines.

When it comes to the note business, UBTI may come in to play when you foreclose on a home and take the existing lien. Take for example your IRA lends a second mortgage for $50,000 when the first mortgage is $100,000. If the investor foreclosed, then the investor would then inherit $100,000 worth of debt and may be subjected to UBTI.

What you may not know is that this type of scenario only really comes into play if the investor converts the property into a long-term rental hold. Due to the debt being acquired was a normal part of the operations of the mortgage note, the UBTI would not be considered if the investor liquidates the property.

There are a lot of complicated rules that surround leverage and the use of retirement accounts. You should be aware that the leverage and impact to your IRA and consult professionals in order to guide you to ensure that you are making prudent business decisions.

USING AN LLC OR CORPORATION

If you plan to make several loans from your IRA, then you may want to become an LLC or corporation. When you set this up, you will have your IRA be the owner of the company while you may be the president. As the president, ensure that you do not pay yourself, as that would be a prohibited transaction. Be aware that many custodians will not accept single member entities such as LLC’s that are funded solely by an IRA and managed by the IRA for fear that the IRA owner will expose their IRA to disqualification as the result of prohibited transactions. Many custodians will review your investment transactions that they execute for their clients with the intent to prevent any prohibited transactions.

Whenever an IRA fund is invested in and LLC, the IRA owner will be the president and the custodian is no longer involved with the transaction execution as everything will be handled by the IRA owner and president. There are some custodians that have addressed several concerns about having a potential prohibited transaction, while still managing to accept the single member investment entities, which require a qualified and independent professional such as an attorney or CPA to sign an agreement that states the client requires that they review and then approve each transaction.

The benefit of setting up an IRA that way is that when your IRA purchases 100% interest in a new corporation or LLC, the cash is then sent to the checking account of your new company. The mortgage notes that you have vested are in the name of the company and not your IRA and you have checkbook control of your own IRA, which makes it easier to advance funds, make loans, etc.

DISCLAIMER AND LIMITATIONS OF USE

The contents are contained and maintained on this guide website are solely for educational or informational purposes only and no portion or content of this content should be considered or relied upon as financial, investment, or legal advice. The provided content of financial, investment, or legal service or as the recommendation of forms or opinions are from the author of this content.

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