If you wondering “how does a hard money loan work“, this article should help explain what they are, what they can be used for and how to use them. Read more about hard money loans below.
Hard Money Loans
When you hear the words “hard money loan” (or “private money loan”) what’s the first thing that goes through your mind? Some shady looking lender who is conducting business in a dark alley while charging sky high interest rates?
In recent years, there have been some bad lenders that have really gave hard money lending a bad name when a few lenders decided to loan-to-own to people which provided very risky loans to borrowers while using real estate as collateral and they intended to foreclose on the property. Luckily, these hard money lenders don’t exist in this market, although there is still some bad blood in real estate investing for those who haven’t used the services of a reputable hard money lender.
This article will cover the basic of hard money loans, which include:
- What are hard money loans
- Types of properties hard money loans work best for
- What deals a hard money loan can be used for
- Interest Rates & Points for a hard money loan
- Hard Money loan to value ratios
- Borrower requirements for a hard money loan
- Finding a hard money lender to work with
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.
Types of Property Hard Money Loans Work Best For
You may get a hard money loan on most types of property which includes single family residential property, commercial, industrial, multi-family residential and land.
There are some hard money loan lenders that specialize in a certain property type like residential and may not be able to do land loans, because they have no experience in that field. Many lenders will have a particular niche that they are comfortable with. Ask which loans that they do.
Most hard money lenders won’t lend on residential properties that are owner occupied due to extra rules and regulations, but there are some that will go through the paperwork with the borrower. Many lenders will do 1st position while fewer will do 2nd position because of the risk.
What Deals Should a Hard Money Loan Be Used For?
A hard money loan isn’t best for all deals. When you are purchasing primary residences with good income history, credit, and there aren’t issues like foreclosures or short sales, conventional loans through a bank are best if the borrower has time to deal with the lengthy approval process. Hard money loans are your source of financing when banks aren’t an option or the loan is needed quickly.
Hard money loans are best for:
- When real estate investors need to act quick
- When the buyer has credit issues.
- Land loans
- Construction loans
- Fix and flips
Who Needs a Hard Money Loan?
Real estate investors will often use hard money loans for various reasons. The biggest reason is that the ability of hard money is to fund it quickly. In many situations, hard money can be funded in a week. Compared to the 45 days that it may take for a bank loan. The application for a hard money loan takes about 2 days, in some instances it could be approved in the same day.
The capacity to get subsidizing at a considerably quicker rate than a bank advance is a critical preferred standpoint for a land financial specialist. Particularly when the land speculator is attempting to secure a property with many contending offers, a snappy close with a hard money advance will stand out enough to be noticed and separate their offer from whatever remains of the purchasers offering moderate regular financing.
Another reason a borrower may utilize a hard money loan is that they have been dismissed by the banks for a typical mortgage. Life doesn’t generally go as arranged. Short deals, abandonments, credit issues… they happen. Another vital thing banks need to see is pay history. In the event that a potential borrower as of late began another employment, the bank may deny the loan ask for because of lacking salary history, regardless of the possibility that the borrower makes a sound pay. Hard money banks can look past these issues as long the advance be reimbursed and the borrower has enough value put resources into the property.
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.
Finding a Hard Money Lender to Work With
There are a lot of different ways to find a good hard money lender. One way is to do a Google search for hard money lenders in your area. There will be other companies in the search results as well as lists made by other people. This provides plenty of lenders to start contacting and checking out.
You can also try attending a local real estate investor club meeting. These meetings are in many cities and are well attended by hard money lenders looking to network with buyers. If no lenders are present at the meeting, ask other investors if they have a lender to recommend. Conventional mortgage brokers, real estate brokers, and other professionals can help to recommend a hard money lender. Check your network and see who is recommended.
Once you have a few on your list, start contacting them and find the best lender for your deal.
Conclusion
We hope that this article has given you enough information and confidence to consider hard money lenders and loans for a future estate deal. The higher interest rates may seem a bit scary, but the benefits of getting a loan quickly and being able to get financing when everyone else has said no is well worth it. Brad Loans by eMortage is a hard money lender in Phoenix, Arizona offering hard money loans to residential and commercial property buyers.
