What You Need to Know About Hard Money Lenders and Loans
Are you interested in hard money lenders and loans and want to know more about them? Keep reading and learn all about them here.
When you think about hard money loans, what’s the first thing that comes to mind? Shady and unscrupulous lenders charging sky-high interest rates? Hard money lending has had a negative connotation and a bad rap in the market for a long time now.
To clear these misconceptions, we’re going to take a deep dive into everything you need to know about hard money lenders and loans. In this comprehensive guide, we’ll learn what hard money loans are, standard requirements, how to find the best hard money lenders, and so much more.
Read on to find out whether this is the kind of loan you’re currently looking for.
What Is a Hard Money Loan?
A hard money loan is a short-term real estate loan mainly used by real estate developers and investors as a source of funding. This type of loan first originated in the 1950s when accessing capital from banks and other conventional mortgage lenders was much easier.
A hard money loan would be the last option for most developers and investors because they came with very high-interest rates.
Today, banks and conventional mortgage lenders are more stringent when offering real estate loans. For this reason, hard money loans have become quite popular amongst investors and developers looking to get construction financing and real estate loans.
Today, most of these investors and developers use hard money lenders as their first option in securing financing in order to develop their projects.
A hard money loan is considered “hard” because it’s secured by real property. The risks associated with this type of loan are usually very high for the lender. Hence you find most hard money lenders charge interest rates as high as 20%.
The underwriting requirements are not similar to those of conventional loans, so lenders have to compensate for the risks.
What’s the Highest Amount You Can Borrow?
The size of a hard money loan will vary greatly depending on certain variables. You’ll find that most private hard money lenders start with a minimum of $50k to $75k and a maximum of about $5m. The amount of money you qualify for will depend on the loan-to-value percentage that every lender has set.
The loan-to-value percentage is the maximum loan amount hard money lenders are willing to finance on properties. The LTV is calculated as a percentage of the purchase price of a property. Hard money loans are usually short-term loans that average between 3 to 36 months, depending on each lender.
How Do Hard Money Loans Work?
Before you start your application for a hard money loan, you first have to find a commercial or residential real estate property you want to purchase.
With the property in sight, you need to do in-depth research and find the best hard money lenders in your area willing to accommodate your needs. Now there’s a huge number of factors to consider when searching for the best hard money lenders.
Comparing rates and fees is an essential part of the process. So is understanding qualification requirements, length of repayments, and penalties associated with late or missed payments. Once you find a lender you particularly like, you’ll then proceed to fill out your hard money loan application.
The application form will require you to provide all your personal information and that of the property in question. You’ll set a meeting with a potential lender either in person or over the phone to discuss your plans for the property. The lender will inquire how marketable said property will be after you’re done with it.
They’ll evaluate the property to determine its current worth and how much potential it has, after which they will evaluate you as the borrower. If they agree to lend you the loan, you’ll move on to the underwriting process.
Once the hard money lender fully approves your loan, you’ll execute the loan documents during the property closing when assuming ownership.
If you include financial rehab into the deal, the hard money lender will carry out a series of inspections throughout the loan term. When the rehabilitation process is over, you’ll either sell the property or turn it into a rental, after which you’ll finally pay off your hard money loan.
Why Does a Hard Money Loan Take Less Time to Approve?
Unlike other conventional types of loans, a hard money loan generally takes less time to approve. When applying for a hard money loan, there is usually very little back and forth between the lender and borrower.
Asset-based loans take less time to approve. Real estate hard money lenders base their decisions on the value of whatever property the borrower presents. Most other financing methods are usually based on whether the borrower meets the requirements and how good their credit report is.
A bank loan, for instance, would require the borrower to show proof that they have the ability to make the mortgage payments for multiple years to come. Other financing lenders will scrutinize your credit score, debt to income ratio, borrowing history, tax filings, ability to pay, and income of the last few years.
Depending on what they find, they may ask you to put up collateral as the type of security for the loan.
Contrary to this, a hard money lender doesn’t require your personal income verification or a good credit score to approve a hard money loan. The lenders’ assurance will be solely based on the property’s potential and not the individual’s.
Before they approve the loan, hard money lenders ensure that it will be possible to foreclose and liquidate that property. Now, properties happen to be a lot more objective than going through a person’s history, so the entire process takes less time.
What Can You Use a Hard Money Loan For?
Hard money loans are usually meant for properties since they are assets based. You can use the loan to buy various types of properties, whether residential or commercial.
It could be anything from a single-family home to vacation rentals, hotels, warehouses, rental properties, or even land. The only rule when applying for hard money loans is that the property may not be owner-occupied.
Will You Require a Down Payment?
Most real estate hard money lenders do require a down payment though it can range in size from as low as 10% to as high as 30%. That said, the actual amount may depend on your track record in the real estate industry and your relationship with your hard money lender.
Once you decide to get into the real estate business, it’s of absolute importance that you build solid and long-term relationships with a hard money lender. When you prove that you can consistently pay back your hard money loan, you’ll qualify for a lower down payment.
What Happens To Hard Money Loan Defaulters?
If by any chance, you’re unable to pay your hard money loan, your hard money lender will foreclose the property and assume ownership. They’ll choose whether to liquidate the property or sell it at a discounted price to another developer or investor who may be able to complete the work.
If your hard money lender was once a developer, they might decide to complete the project themselves.
You should understand before you default that some states don’t take hard money loan foreclosure like those of personal properties. If a trust deed secures your hard money loan, it will allow the hard money lender to keep all the proceeds they make once they sell the property.
This may come off as unfair to you, but hard money loans are mostly meant for businesses and don’t come with the same personal rights. On the upside, if your hard money lender retains this option, your default will not hurt your business or personal credit score. There’s also a very high chance that it will not show up on your financial history.
What Are the Costs Associated With Hard Money Loans
The costs associated with a hard money loan will highly depend on the lender and the business models. Still, expect to pay various charges across the board for getting the loan. The first thing you should know about is the points, also known as loan origination fees.
They serve as compensation for hard money lenders, and they can be anything from one to five points. What this means is that if your loan is approved for $200,000 and the hard money lenders charge 3 points, you’ll pay $3000 in fees. You’ll also need to pay loan document fees, prepaid interest, prepaid penalties, interest rates, and other miscellaneous fees.
Prepaid interest is what your lender will charge you when you receive money in the middle of the month. It’s like renting the loan before the interest rates kick in at the beginning of the other month. Prepayment penalties are an early termination fee that you’ll have to pay if you pay off your loan before its due date.
The lender could charge you a prepayment penalty if you pay the loan in full too early or make large partial payments within a certain time. Miscellaneous fees will include things like appraisal and inspection fees. Your interest rate will depend on many factors, such as a loan-to-value percentage.
How Do You Pay Off Your Hard Money Loan?
Once you take out a hard money loan, you’ll only pay off the interest rate at the end of every month. This is usually the preferred payment method for most real estate investors. You see, it lowers the monthly installments and allows them to use the money appropriately until the project is done.
In the end, you’ll make a balloon payment, which is a full payment of the loan at the end of the loan term. Most investors who take out hard money loans expect to sell the property and afford to pay the loan in full. Others expect to refinance the loan in order to make a full payment.
Hard Money Lenders: Everything You Need to Know About Hard Money Loans
Now that you know what hard money loans are all about, do you think taking out a hard money loan is a viable option?
If so, all you have to do is find the best hard money lender for beginners in your area. Search for “the best hard money lenders near me” on your search engine to locate professional hard money lenders in your location.
Depending on your reason for taking out a hard money loan, it can be an excellent form of financing if you’re looking to get into real estate investing. The application and qualification process is much faster and easier compared to other types of financing.
If you’re ready to take out your first hard money loan, please get in touch with us, and we’ll be more than glad to accommodate you.