Hard money loan | Property for Hard Money Loans || Deals On Hard Money Loans || Interest Rates on Hard Money Loans || Requirements for Hard Money Loans
Hard money loan – refers to a short-term loan acquired by real estate. They are fund financed by the private stakeholders or a fund of investors as opposed to conventional lenders such as banks or credit unions. The terms are generally around 12 months, but You can ask for a lengthy or longer repayment time frame, but even that timeframe is only about 2-5 years.
When evaluating hard money lenders, pay close attention to the fees, interest rates, and loan terms, It’s called a “hard money” loan since it’s harder to obtain and payback than its soft money equivalent. Instead of looking at your credit score.
Nevertheless, the amount the hard money lenders are willing and able to lend the borrower is principally based on the value or worth of the subject property. The asset may be one the borrower already owns and choose to use as collateral or it may be the asset the borrower is obtaining.
Hard money lenders are mostly concerned with the asset value rather than the borrower’s credit while credit is still of some value to the lender. Borrowers who cannot obtain conventional financing due to a current foreclosure or short sale can still acquire a hard money loan if they have enough equity in the asset that is being used as collateral. If the banks say “No”, hard money lenders can still say “Yes”.
Types of Property for Hard Money Loans
A borrower can obtain a hard money loan on almost any type of asset – as well as single-family residential, multi-family residential, commercial, industrial, and land.
different hard money lenders may specialize in one particular asset type such as residential and won’t be able to do land loans, just because they have no experience in this section. every hard money lenders have a particular niche of loan they are usually comfortable with. Make enquiries upfront on the type of loans they are willing and able to do.
Numerous hard money lenders won’t lend on owner-occupied residential assets due to the additional rules and regulations, but there are those who are ready to wade throughout the paperwork with the borrower. All hard money lenders will do loans in 1st position, while fewer will do 2nd position due to the additional risk for the lender.
Also, Read – SBA LOAN
Deals On Hard Money Loans
Hard money loans are not suitable for all deals. When buying a primary residence with good credit, income history, and there is no problems such as a short sale or foreclosure, conventional financing across a bank is the perfect way to go if the borrower still has limited time to go through the long approval process involved by the bank. Hard money is another option, source of financing when banks are not an option or the loan is required in a short period of time.
Hard money loans are perfect for situations such as:
- Fix and Flips
- Construction Loans
- Land Loans
- When the Buyer has credit issues.
- When a real estate investor requires to act faster.
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People Using Hard Money Loan?
Real estate investors always select hard money for many different reasons. One of the main reason is the potential of the hard money lender to fund the loan faster. In some situations, hard money loans can finance between a week. Compare that to the one of 30 – 45 days it involves to get a bank loan funded. The application platform for a hard money loan usually takes a day or two and in some scenarios, a loan can be perfected the same day. Good luck observing back about a loan approval from your bank within the same week!
The ability to get funding at a much quicker rate than a bank loan is a significant benefit for a real estate investor. mostly when the real estate investor is trying to get an asset with many competing bids, a fast close with a hard money loan will get a seller’s time and set their offer apart from the rest of the customers offering slow conventional financing.
Another option a borrower may select to use a hard money loan is that they have been rejected by the banks for a conventional loan. Life at times doesn’t always go as planned. Short sales, foreclosures, credit issues… they happen. Another notable thing banks need to see is the availability of income history. If a potential borrower currently started a new job, the bank may decline the loan request due to poor income history, even if the borrower makes a good and healthy income. Hard money lenders are ready to look past these problems as long the loan be repaid and the borrower has more equity invested in the asset or property.
Interest Rates and Points for Hard Money Loans
Interest rates and points charged by hard money lenders will differ from lender to lender and will also differ from region to region. For example, hard money lenders in California usually have lower rates than other parts of the country because California has so many hard money lending industry. additional competition guide to a decrease in prices.
Hard money lenders take on additional risk with their loan compared to a conventional bank loan. Because of this high risk involved on a hard money loan, the interest rates for a hard money loan will be high rise than conventional loans. Interest rates for hard money loans vary from 10 – 15% depending on the particular lender and the look on the risk of the loan. The Points can vary anywhere from 2 – 4% of the full amount loaned. The interest rates and points may vary greatly hang on the loan to value ratio.
Hard Money Loan to Value Ratios
The loan amount of money the hard money lender is willing to lend is determined by the ratio of the loan amount divided by the value of asset or property. This is recognized as the loan to value (b). Different hard money lenders will give up to 65 – 75% of the current value of the property, while Some lenders will lend on the basis of after repair value (ARV) which is the total sum of the value of the property after the borrower has upgraded the property. This allows a riskier loan from the hard money lender’s point of view due to the amount of capital put in by the lender increases and the amount of capital that is put in by the borrower decreases. This increased risk will give way or cause a hard money lender to charge a high rise interest rate.
We have different hard money lenders who are willing to lend a very high percentage of the ARV and will even finance the rehab costs. This may sound great from the borrower’s point of view, to begin with, but this kind of loans has a much high rise risk involved and the interest rate and points will be MUCH higher. Expect 15 – 18% interest and 5 – 6 points in the process a lender funds a loan with little to no down payment from the borrower. In some instances, it may be rewarding for the borrower to pay these sky-high cost rates in order to seal the deal if they can still get some profit from the project.
Borrower Requirements for Hard Money Loans
As mentioned earlier, hard money lenders are particularly worried about the amount of equity the borrower has put in the asset that will be used as collateral. They are less worried about the borrower’s credit rating. problems on a borrower’s record history such as a foreclosure or short sale can be given over if the borrower has the capital to pay the interest on the loan.
The hard money lender will also examine the borrower’s plan and decision for the property. The borrower must table a good and reasonable decision plan that shows how they intend to pay in the long run off the loan. Generally, this is upgrading the property and selling it or getting long-term financing later on.
Searching For Hard Money Lender to Work With
We have so many different platforms or ways to find a reputable hard money lender. One of the easiest methods to find a local hard money lender is to search Google for [your area] “hard money lenders” on the google search engine there will be personal companies in the search results as well as lists of hard money lenders compiled by others. This will supply a good amount of lenders to begin contacting and assess.
Another option or way of find a hard money lender is by taking part in your local real estate investor club meeting. This kind of club meetings exist in most cities and are normally well-attended by hard money lenders looking to network with prospective borrowers. If no hard money lenders are currently available at the meeting, make inquiries about other real estate investors if they have a hard money lender they can suggest. Real estate brokers, conventional mortgage brokers, and supplementary real estate professionals may be willing to refer an experienced hard money lender. Leverage your available network and see who is most mentioned or approved.
Since a list of few lenders has been compiled together, it’s time to start contacting them and finding the most acceptable lender to fund your next deal.
Confidently, this article has supplied you with enough knowledge, understanding, and confidence to accept and consider a hard money loan to fund one of your upcoming and future real estate deals. The high-interest rates may seem scary at first, but the benefits of getting a loan funded quickly and being able to obtain financing when all the banks have said “No” will far outweigh the extra cost.