If parting with a large sum of money upfront makes you uncomfortable, then a hard money loan may be the way to go. Although these types of loans give you advantages over regular financing, there are some potential drawbacks that you should be aware of.
Hard money lenders work primarily with real estate investors and provide capital for renovating and purchasing properties. They have a well-rounded understanding of the unique needs of the investor and because of this, they work much differently than the typical mortgage lender.
This article will cover the following areas:
- What is a hard money loan?
- How does a hard money loan work?
- Hard money loans for real estate.
- Hard money lender considerations.
- Hard money loan requirements.
- Hard money loan benefits.
- Interest rates and points.
- Value ratios.
- Hard money loans vs traditional lender construction loans.
- Hard money loans vs mortgage.
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.
How Does A Hard Money Loan Work?
A bridge loan or hard money loan is a tool for short term lending which is used by real estate investors for financing investment projects. It is quite common for bridge loans to be used by real estate developers or house flippers that have a goal of developing or renovating properties than selling them for profit. Private lenders will issue hard money loans, instead of financial institutions like banks or credit unions.
Traditional bank loans tend to focus on the creditworthiness of the borrow, while hard money loans aren’t based on solely on your credit. It is based on your ability to pay back the loan along with the merit of the real estate investment opportunity and property value to approve the loan. The lender will pay close attention to the after repair value or ARV, which is an estimate of the property value after the renovation or development has been completed. Lenders will also take into account your plan for what needs to be done to a property, who will do it, and how it will be paid for. The overall business plan is a larger factor in these lending situations than the credit history of the borrower.
Hard Money Loans For Real Estate
Hard money lenders are in the business of funding real estate property investments – not the standard dream house of the homeowner. Usually, investment properties need work so they can be sold at their full value. Either through resale (the classic “Fix & Flip”) or for renovating and buying a property for rental.
If a real estate investor does not have deep pockets, a hard money loan is a viable option so they do not have to pay cash for every property they buy. Although having shorter terms and higher rates, hard money borrowing is simply a game of numbers. When everything you are investing comes together for profit, a hard money loan can be a good choice.
If you are unsure of the higher rates and lack another source of funding you may have to walk away from a great deal, so it may well be the case a hard money loan is a good choice after all.
What Hard Money Lenders Consider When Funding A Property
Lenders will often use a decision matrix known as “The Six C’s” when they consider their options to fund a property. The goal is to minimize risk while still making money.
Lenders are looking for more than higher yields. They eat secure, safe investments that make a return on their capital and a return on investment that is solid. They need to know when they will be paid back and how. Relationship building is important to hard money lenders as they like to build repeat business with investors.
Hard Money Loan Requirements
Here are the seven requirements to receive a loan from a hard money 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 Loan Benefits
Clearly there are limitations to convention loans offered by banks, especially for fix and flip opportunities. They take longer and are limited by bank conducted property appraisals. Hard money loans offer huge advantages for investors and home buyers.
Much Faster Application Process: The application process requires less documentation and is conducted much more quickly. The borrower’s financial history will be looked at but more importantly if the borrower is able to produce a down payment and the project’s merits. Many loan applications can be approved and funded in as little as 7-10 days! Compared to the month or more that conventional loans you will have a much greater chance of getting the property secured for your real estate investment project, or the home of your dreams.
Greater Fix & Flip Flexibility: Hard money lenders evaluate the feasibility of project to turn a profit based on what it will generate during the renovations or upon completion of the project when it is sold. The condition of the property is taken into consideration but hard money lenders are not as concerned with the present value of the property as they understand that an integral element of the process is to improvement of the property. A factor that hard money lenders value is, how quickly a real estate investment will make them back their investment, plus the interest on the loan. Read more about: Fix And Flip Loans
Funding For Bad Credit: Whether you’ve just started out and don’t have any established credit history or if you have had problems with your credit, hard money lenders have much more flexibility to who they make loans to. This is a major advantage for a lot of consumers that have unavoidable credit challenges but still want to purchase a home, or want to get involved with real estate investing.
Interest Rates And Points
Depending on the area of the country where 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 when 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 borrowing the money. However, if the borrower can still make a profit at these interest rates, they may decide it is their best option.
Hard Money Loans Vs Traditional Lender Construction Loans
While conventional loans are issued traditionally by banks, hard money loans are provided by investors or investment groups. Hard money construction loans are secured by the real estate being purchased. They often charge higher interest rates than loans from a bank, but can close in just a few days. When considering hard money vs. traditional construction loans, you should consider the following questions:
When Do You Need The Money?
Time is often vital when it comes to the success of the project. Funding a loan quickly can often be the difference when you need to secure a great deal. Though timelines vary when it comes to obtaining a construction loan, hard money loans tend to be quicker. While most hard money construction loans can be funded within a week, traditional lenders often take a great deal longer.
How Should Your Loan Be Structured?
Traditional lenders take a one-size-fits-all approach to construction loans. Their terms are straightforward, but there is little room for negotiation when it comes to your specific loan requests. On the other hand, hard money lenders often provide more flexible terms. This means hard money lenders can structure the loan terms in ways that benefiting everyone. In addition, they can also provide repayment schedules that are structured to meet the borrower’s individual requirements.
What Type of Loan Is Available To You?
Approval is one the most important when it comes to construction loans. Even with a good financial history, the bank may still see something in your application that indicates you aren’t a good fit for a conventional loan, such as incomplete records or self-employed work. Hard money lenders are able to take more than just the borrower or company’s financial history into account.. A hard money lender looks at your ability to repay the loan as well as how much equity you have invested in the property.
Which Loan Type Is Best For You?
If you hwere turned down for a conventional loan, then a hard money loan may be just the solution to helping you get your project funded. Similarly, if the less flexible loan structures offered by traditional lenders don’t work for you, then you may want to explore your hard money loan options. In this business, being able to quickly take advantage of deals and secure land or properties is important. While conventional loans are slower when it comes to approval and funding, hard money loans can be completed and funded quickly, allowing builders to jump on excellent opportunities. Finally, consider which loan will give you the flexibility and terms you need to get your project off the ground.
Hard Money Loans Vs Mortgage
If you’ve found a property that you’d like to buy but need financing you’re likely considering one of two options. Either you’re going to go for a conventional mortgage or you might be considering a hard money loan. Most adults that have financed a car or a home understand how bank mortgages work. But less adults know what hard money loans are or how-to quality for one.
Difference In Time To Get Financed
One of the biggest differences is the time it will take to get financing and purchase the property you’ve found. When it comes to conventional mortgages it will take weeks, a month, or more to close. When you get a hard money loan you’ll be closing on your new property in usually about a week or less. If you’ve found a hot property getting the financing squared away faster than other buyers is a huge edge. This is especially true if you’re investing in real estate and a prime property has just come on the market.
Duration Of The Loan vs. Mortgage
Mortgages are typically set up for 30 year fixed interest rates. These loans are full amortized and much longer term than hard money. In contrast a hard money loan have a duration of usually a year or less and are interest only. At the end of the year many investors have sold or owners can now refinance.
Where The Money Comes From
Traditional mortgages get their money from lenders and banks who sell loans to larger banks or to various investors. In contrast the money for hard money loan generally comes from a private lender. Some hard money lenders use lines of credit or investment funds where others are individual investors. In the case of Brad Loans; we fund our loans ourselves.
Loan Or Mortgage Approval
In hard money lending collateral is the most important factor. It overcomes issues with bad credit or no credit. If you have enough income, the property you’re buying has enough value, and your collateral property is worth enough, you’re likely going to get approved. In hard money lending the loan to value or LTV is an important factor.
You’ll need to have a down payment ready to cover a portion of the property’s cost or be ready to have cross collateral with additional free and clear paid off real estate to put up against the loan. This is done to make it easier for the lender to have a high degree of certainty that they’ll get their money back.
Difference in Interest Rates
Hard money lending is many times done at higher interest rates. This is because it is used for properties that are distressed and in cases where lenders have less than perfect credit. In addition, the loan terms are much shorter and lenders need higher interest rates to justify making the loans. Banks that chip away at you for 30 years collect more money, just slower over a longer period of time.
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.
