hard money loans

Hard Money Loan Requirements

Hard Money Loan Requirements

Hard money loans are great financing options for real estate investors wishing to fix and flip a property. There are 7 requirements to secure a hard money loan.

What Is A Hard Money Loan?

The definition of hard money loan is: A last resort loan or short-term loan to close a bridge or gap in your finances. A hard money loan is not based on credit but it is backed by the overall value of the property.

Due to the property being used as the protection against default from the borrower, these type of loans usually have a low loan-to-value ratio also known as (LTV) typically lower than other traditional loans.

  • Hard money loans are mainly used for real estate transactions and are money from a company or an individual and not a financial institute.
  • A hard money loan, typically taken out for a brief period of time, is a way to raise money fast, but at higher costs and a lower loan to value (LTV) ratio.
  • Since hard money loans aren’t commonly executed, the funding deadline is extremely reduced.
  • The conditions of hard money loans may frequently be negotiated between the lender and the borrower. These types of loans usually use property as the collateral.
  • Repayment could lead to default but nevertheless end up in a profitable business deal for the lender.

Step 1. Save Up A Down Payment

A down payment on a hard money loan is oftentimes larger than a down payment made on a traditional mortgage. This is simply because the loan is only backed by the property in question. The down payment on this loan is the difference between the purchase price plus the budget, and 70% of the ARV.

For instance, let’s assume an investor is purchasing a property for $200,000, with a $50,000 budget. The down payment would then by 70% ARV – purchase – budget. So, $300,000 x 70% – $210,000 – $50,000 equates to a $40,000 down payment. Bear in mind you also must cover the property insurance, fees, closing costs and other underwriting expenses.

Step 2. Set Up LLC.

Few of these projects in real estate go exactly as planned. Setting up an LLC for your investment(s) is the best way to protect your personal assets, while limiting your risks at the same time.

Most hard money lenders tend to only lend to corporations and LLCs. Hard money lenders will not issue consumer loans, so working with an LLC ensures the loan is strictly a business transaction.

Step 3. Find A Reputable Hard Money Lender

Not all hard money lenders are the same. These are privately-owned businesses and individuals, so it’s crucial to weigh these factors when searching for a lender:

  • Reputation: Does the lender have a good reputation among local builders and home flippers?
  • Speed: How fast can the lender get you the funds you need for the project?
  • Affordability: Shop around for competitive rates since hard money lenders have higher interest rates than traditional loans.
  • Location: Make sure you always work with a local lender.

Step 4. Prepare Your Proof Of Income

Getting approved for hard money loans will require much less paperwork than applying for a traditional loan. One of the few requirements is providing proof of income. Your lender needs to know that you can make the required monthly payments prior to giving you said loan.

Step 5. Set Up A Payment Strategy

These are short-term investments, with usual terms of 12-24 months. This means you will need an exit strategy from the start.

The most common strategy is selling the property within the loan period. Most hard money loans are passed out for flips or construction projects. Investors typically sell the property at a profit once the work is completed.

Step 6. Apply For The Loan

Applying for these loans is surprisingly simple. There are very few requirements, as mentioned above, and hard money lenders usually have applications available online.

Step 7. Review Paperwork With An Attorney

The last suggested step to take is reviewing the paperwork with an attorney. An attorney will check the following items:

  • Are all the fees disclosed?
  • Is the payment schedule included and clear?
  • Does the agreement clarify how much of the payment is applied to interest?

Hard Money Lenders in Phoenix, AZ

When you are searching for hard money loans near me in Phoenix, Scottsdale, Glendale, Tempe, Mesa, Chandler, or Gilbert, Arizona; Brad Loans is Arizona’s most trusted direct hard money lender! We specialize in hard money loans for Fix and Flip, refinancing mortgages with bad credit, business loans secured by real estate, real estate purchases, short sales, and other endeavors with quick turnaround in the Phoenix Valley.

BradLoans.com is the most trusted direct hard money lender and private money lender in Arizona! We are the best hard money lender in Arizona with the ability to fund commercial & residential hard money loans many times within a couple of days or less. Our lending rates and fees are reasonable compared to other Arizona hard money brokers or mortgage brokers in Arizona.

What Is A Hard Money Loan?

What is a Hard Money Loan?

The definition of hard money loan is: A last resort loan or short-term loan to close a bridge or gap in your finances. A hard money loan is not based on credit but it backed by the overall value of the property.  Due to the property being used as the protection against default from the borrower, these type of loans usually have a low loan-to-value ratio also known as (LTV) typically lower than other traditional loans.

According to Investopedia, “A hard money loan is a type of loan that is secured by real property. Hard money loans are considered loans of “last resort” or short-term bridge loans. These loans are primarily used in real estate transactions, with the lender generally being individuals or companies and not banks.”

  • Hard money loans are mainly used for real estate transactions and are money from a company or an individual and not a financial institute.
  • A hard money loan, typically taken out for a brief period of time, is a way to raise money fast, but at higher costs and a lower loan to value (LTV) ratio.
  • Since hard money loans aren’t commonly executed, the funding deadline is extremely reduced.
  • The conditions of hard money loans may frequently be negotiated between the lender and the borrower. These types of loans usually use property as the collateral.
  • Repayment could lead to default but nevertheless end up in a profitable business deal for the lender.

Brad Loans Explains “Hard Money Loans”

A hard money loan will usually carry higher interest rates than subprime loans or traditional loans. Traditional lenders don’t usually make hard money loans, hard money lenders are usually private investors that see potential in this risky market. Hard Money loans are commonly used in quick flip, short term financial needs or by loan borrowers with bad credit but have equity in the property they own and wish to avoid foreclosure.

How Does a Hard Money Loan Work?

Hard money loans have conditions that are mainly based on the value of the property that is used as collateral, and not on the credit worthiness of the borrower. Because traditional lenders, like banks, don’t execute hard money loans; hard money lenders are usually private individuals or companies that see worth in these types of possibly risky endeavor.

Hard money loans might be wanted by property flippers that plan to renovate and then resell the property that’s used as collateral for the financing—usually within a year, if not sooner. The higher costs of hard money loans are offset by the fact that the borrower plans to pay the loan off somewhat fast—some hard money loans are for 1 to 3 years—and by many of the other benefits, they provide.

Hard money lending may be considered as an investment. There are a lot of individuals who’ve used this as a business format and proactively practice it.

Unique Considerations for Hard Money Loans

The costs of a hard money loans to the borrower is usually higher in comparison to the financing available using government lending programs or banks, considering the higher risk that the lender is undertaking by offering the financing. Nevertheless, the increased expense is a tradeoff for faster access to funding, a less strict approval process, and possibly flexible in the repayment schedule.

Hard money loans can be used in short term financing, in turnaround circumstances and by borrowers that have bad credit but considerable equity in their property. Because they can be issued fast, hard money loans may be used to avoid foreclosure.

The Pros and Cons of Hard Money Loans

Hard money loans have their pros and cons. Keep reading to learn more about the pros and cons of hard money loans.

Pros of Hard Money Loans

One advantage is that the approval process for a hard money loan is usually much faster than applying for a mortgage or other conventional loans using a bank. The private investors that back hard money loans can make decisions faster since they usually do not do credit checks or review a borrower’s credit history—the steps lenders typically take to investigate a potential applicant’s capability to make their loan payments.

These investors are not as concerned about getting repayment because there might be an even greater worth and the possibility for them to resell the property themselves, should the borrower default.

An additional advantage is that because hard money lenders don’t use a conventional, customary, underwriting method, but assess each loan on a case by case basis, applicants can usually negotiate modifications regarding the repayment schedule for the loan. Borrowers may aim for more chances to pay back the loan during the timeframe available to them.

Cons of Hard Money Loans

Because the property on it own is used as the only safeguard against default, hard money loans typically have lower loan to value (LTV) ratios than conventional loans do: around 50 percent to 70 percent vs. 80 percent for standard mortgages (though it may increase if the borrower is a seasoned flipper).

Additionally, their interest rates are prone to be higher. For hard money loans, the rates may be even higher than those of high-risk loans. As of 2019, the rates of hard money loans were ranging from 7.5 percent to 15 percent, subject to the duration of the loan. Comparatively, the prime interest rate was 5.25 percent.

One other disadvantage is that hard money loan lenders may choose to not offer financing for an owner occupied residence considering regulatory monitoring and compliance by laws.

Hard Money Lenders in Phoenix, AZ

When you are searching for hard money loans near me in Phoenix, Scottsdale, Glendale, Tempe, Mesa, Chandler, or Gilbert, Arizona; Brad Loans is Arizona’s most trusted direct hard money lender!  We specialize in hard money loans for Fix and Flip, refinancing mortgages with bad credit, business loans secured by real estate, real estate purchases, short sales, and other endeavors with quick turnaround in the Phoenix Valley.

BradLoans.com is the most trusted direct hard money lender and private money lender in Arizona! We are the best hard money lender in Arizona with the ability to fund commercial & residential hard money loans many times within a couple days or less. Our lending rates and fees are reasonable compared to other Arizona hard money brokers or mortgage brokers in Arizona.

Hard Money Loan Rates

Are Down Payments Needed

The average interest rate for a hard money loan is 11.25% with rates varying from 7.5% to 15% for the US in 2020. Hard money lenders also charge “points” and each point is the equivalent of one percent of the loan. These points help to cover the expenses of the loan and mitigate the risks the lender is undertaking. Points are normally paid upfront as opposed to interest that is paid back monthly.

Interest Rates And Points

Depending on the area of the country wherre you reside and from lender to lender, points charged and interest rates will differ. In many cases competition plays a large part in the rates offered. In a heavily populated area of the country where there are many hard money lenders – competition will drive interest rates and points charged to a lower total cost than in more rural areas where there is not so much competition. Obviously there is greater risk taken by hard money lenders when they lend money compared to hwne a bank does so – hence the interest rate will be higher than conventional bank loans. As well as interest rates in the ten to fifteen percent range, you can expect the points to be somewhere around three percent with variances from around two to ten percent, depending on the ratio of the loan to value.

Value Ratios

The Loan to Value (LTV) is decided by the ratio of the amount of the loan divided by the value of the property. Often hard money loan lenders will lend up to around seventy percent of the properties current value. Some hard money loan lenders will lend money based on the ARV or After Repair Value – that is to say the value after improvements to the property have been completed. However, this is a riskier loan proposition from the perspective of the hard money lender, because they are putting more money upfront and therefore will come at a higher interest rate. Some hard money lenders will even finance the rehab costs and lend a higher percentage of the ARV but as these loans are far more risky, you can expect far higher rates of interest in the region of fifteen to eighteen percent and five to six points when the lender is fundinga loan with little or no down payment from the person who is borrowingthe money. However, if the borrower can still make a profit at these interest rates, they may decide it is their best option.

Phoenix Hard Money Real Estate Loans

If you’re interested in getting involved with real estate investing and need the capital to purchase properties hard money is a great way to get started.  Brad Loans has extensive experience in both real estate investing and hard money lending and is proud to offer Phoenix Valley real estate investors the financing they need.  It is easy to get started applying for hard money loan and Brad Loans is able to work with clients with bad credit and no credit. We are your source for hard money when traditional banks say no.  Read more about Brad Loan’s hard money loan programs or get started fill out our hard money loan application or give us a call to ask questions at 480-948-0880.

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