Hard money loans offer a lot of benefits for real estate investors. Most importantly a hard money loan allows a real estate investor to use other people’s money. With a hard money loan, real estate investors can close quickly, giving them more buying power. Generally, hard money lenders can be more flexible than traditional lenders and banks.
What’s a hard money loan?
A Hard Money Loan is a loan in which real estate serves as the collateral asset. It’s a “Sub-prime Loan” that works on collateral-based underwriting. It puts more emphasis on the lendable equity in your property rather than on your credit. So you can say that it is more of an equity-based loan.
Simply because it is more of an equity-based loan, it does not mean that only people with credit problems apply and get hard money loans. Many borrowers of hard money loans have good credit. The only reason they go for a hard money loan is that it is FAST! And because it cuts through the red tape. And the borrower, especially the self-employed borrower, does not have to provide income verification. It is not uncommon to get funding in 5 days if the borrower can provide the necessary information on time. Hard money loans are also used for bridge or short-term financing. The hard money loan is usually from a private lender.
A hard money loan is a type of asset-based loan financing in which a borrower receives funds secured by the value of a parcel of real estate. Hard money loans are normally issued at much higher interest rates than conventional commercial or residential property loans. They are rarely given by a commercial bank or other deposit institution.
Hard money is similar to a bridge loan which usually has similar criteria for lending and the cost to the borrowers. The main difference is that a bridge loan generally refers to an investment property or commercial property that may not qualify for traditional financing. In contrast, hard money often refers to not only an asset-based with a high-interest rate but likely a distressed financial situation, such as arrears on the existing mortgage, or where foreclosure and bankruptcy proceedings are occurring.
Private investors make many hard money mortgages, generally in their local areas. Usually, the borrower’s credit score is not critical, as the value of the collateral property secures the loan. Typically, the maximum loan to value ratio is 65-70%. For example, if the property is worth $100,000, the lender would advance $65,000-70,000 against it. This low LTV provides added security for the lender if the borrower does not pay and they have to foreclose on the property.
Hard Money Loan Structure
A hard money loan is a type of real estate loan collateralized against the quick-sale value of the property for which the loan is made. In general, lenders fund in the first lien position, meaning that they are the first creditor to receive remuneration in the event of a default. Sometimes, a lender will subordinate to another first lien position loan; this loan is a mezzanine loan or second lien.
Hard money lenders structure loans based on a percentage of the quick-sale value of the property. Lenders refer to this as loan-to-value or LTV ratio and typically hovers between 60 and 70% of the property’s market value. To determine an LTV, the word “value” is defined as “today’s purchase price.” This is the amount a lender could reasonably expect to realize from the sale of the property if the loan defaults and the property must be sold in a one to a four-month timeframe. This value differs from a market value appraisal, which assumes an arms-length transaction in which neither buyer nor seller acts under duress.
Below is an example of how a hard money lender might structure a commercial real estate purchase: 65% Hard money (Conforming loan), 20% Borrower equity (additional collateralized or cash real estate), 15% Seller carryback loan or other subordinated (mezzanine) loan.
What’s a hard money lender?
A hard money lender offers loan funding based on real estate as the primary collateral asset.
Hard money lenders are lending institutions offering a specialized type of real-estate backed loan. Hard money lenders offer short-term loans (also called a bridge loan) that provide funding based on the value of the real estate that has been collateralized for the loan.
Hard money lenders generally have much higher interest rates than banks because they fund deals that do not conform to bank standards. Hard money lenders will present various requirements on the loan-to-value percentage, type of real estate and minimum loan size for a loan.
Do hard money lenders require down payment?
The primary requirement for getting approved for a hard money loan is either equity in the property to be used as collateral or a down payment. The minimum down payment ranges between 25% and 30% for residential properties and 30% to 40% for commercial properties.
Occasionally, a hard money lender may allow a borrower to use multiple properties to secure one loan. The term for this is “cross-collateralizing.” A borrower has a better chance of being approved with higher equity or a more significant down payment. The more the borrower has invested in the property, the lower the risk is for the lender.
What’s hard money in real estate investing?
For real estate investors without connections to private lenders or a line of credit with a bank, a hard money loan is a smart option for buying and renovating an investment property. A hard money loan can be fast and relatively simple access to funds. Real estate investors with less than stellar credit also use hard money loans to finance investments. Investors are awarded hard money loans based on the value of the property rather than on your creditworthiness.
Experienced real estate investors use hard money loans because it’s easier to get and comes without all the red tape associated with conventional property loans. A hard money loan is an excellent option for time-sensitive transactions that need to close fast. They are also perfect for funding renovation projects that other lenders refuse to finance. Hard money is also a favorite for many rehabs. The ideal turnaround time for buying, renovating, and selling houses is usually six months to a year, requiring speedy execution that hard money lenders willingly accommodate.
If your real estate investment goes well, you may want to repay your loan sooner than initially agreed. While some larger lenders may penalize you for early repayment, private money lenders don’t. In addition, many hard money lenders have no prepayment penalties.
Are hard money loans worth it?
For real estate investors, hard money loans are worth it. Hard money loans are great if you want to start flipping houses. This type of financing has many benefits compared to traditional real estate loans. In addition, hard money loans are worth it because of their expeditious nature.
Another benefit of using hard money is that many lenders want to loan you what you need to help close the deal when you find fixer-upper homes for sale. Though lender requirements may vary, they specialize in funding riskier investments with riskier borrowers. And many times, all it takes is doing an online search for a hard money lender, completing an online application form, and waiting a couple of days to hear back. As long the lender believes the property is worth investing in and that they can make a profit, your chances of approval are fairly good.
Also, compared to other types of real estate loans for investors, hard money remains an easier and accessible means for financing a renovation. However, appraisals may be required and regular inspections to verify compliance with state and local code. Without a doubt, the use of hard money is worth serious consideration for any real estate investor.
How much do you have to put down on a hard money loan?
Hard money lenders generally require you to put down between 10 and 25% of the purchase price of the property.
Are hard money loan interest rates high?
Generally, hard money loan interest rates are higher than traditional home loans. You could pay as high as 18%. The higher interest rates come with some advantages. Most importantly, hard money lenders offer flexible repayment terms.
What types of hard money loans are available?
There are multiple different types of hard loans available to investors and the building industry.
- Bridge loans – for purchasing a property or to finance a real estate development
- Construction loans – for time-sensitive construction projects
- Owner-occupied loans – for borrowers who intend to live in a property
- Blanket loans – to reposition debt across a portfolio of investments
- Commercial loans – made for commercial real estate rather than residential
- Second and third mortgages – an alternative to traditional lender financing
What documents are required for hard money loans?
Generally speaking, for a hard money loan you will need the following documents:
- Loan Application.
- Copy of recent mortgage statement, if available.
- Homeowner’s insurance agent’s name and phone number.
- Appraisal, if one is needed, will be ordered by the lender.
- Title report – will be ordered by the lender.
And any other document the lender may require to approve your loan.
Questions about hard money loans
Q: I have a 698 Experian credit score …my debt ratio is bad…However, I have a paid-off piece of property in Michigan worth about $80K that I would like to use to secure the loan…$15,000/. Should I consider a hard money loan? Thanks.
A: Experian considers scores over 700 a sign of good credit management. With a slightly lower score and a high debt-to-income ratio, you may not get the best terms from the bank. With a hard money lender, your recent sale will have more weight on your approval. Compare available rates from both to see where you get the best deals. Having a regular income and owning other assets may also help your case.
Q: How soon am I able to get cash to purchase a foreclosed home?
A: Most hard money loans take less than two weeks. To avoid delays, have all the paperwork on hand (employment, purchase offer, loan amount needed, etc.) and be ready to answer questions about what you plan to do with the property.
Q: I do not want to have to pay anything in order to get this loan sent to me. I need $20.000 for 18 months. Can I get a hard money loan without me paying anything upfront to get it in hand? I am willing to pay high interest
A: Hard money loans are made specifically for urgent cases like this one, but most lenders will want more information to properly assess your risk. When you apply for a hard money loan, make sure to provide relevant information such as the amount you need, why you need it, and how you plan on paying it back, with documents to support your answers.
Q: I am looking for a lender to help me save my home asap
A: If the foreclosure process has started, you need to contact a hard money lender right away. Approval only takes about two weeks, but the earlier you act, the better your chances of stopping the foreclosure. Look for a lender who specializes in residential hard money loans, so they’ll be more understanding of your needs.
Q: I would like to apply for a hard money personal loan by using one of my homes as collateral.
A: If the value of your home is enough to cover the loan amount plus interest, then you shouldn’t have any problems getting approved. Lenders will usually want proof of ownership of the home and may order an appraisal.
Q: Do you have lenders for attached single-family units? Need financing to finish a three-unit building that is approx 90% completed
A: What you need is a construction hard money loan, which finances the building of properties. These loans are usually dispensed in stages to match the progress of construction. Lenders will require a thorough plan stating the completion date and the estimated value of the finished project.
