Hard money loans can be a great option for real estate investors looking to get into the real estate game and use other’s money to do it!
When investing in one or many properties as a borrower, hard money is an option that many will consider trying to get their hands on. With private money loans a borrower can quickly turn the offer and sometimes be the best option for the seller because of the like cash offer!
Hard money loans can be a consideration for many reasons one including that there are many private lenders that will let a qualified borrower lend from them with much less of a hassle but typically at a higher interest rate and cost. The hard money loan can be used during construction which is a great feature to get some builders to a starting point. Borrowers who use the hard money to start their builds typically have a plan to refinance the home upon completion into a more conventional mortgage.
Hard money loans can have some perks for the buyer to look like a cash deal but they are also for the purpose typically for a quick use and there should be a long term plan for any property that will be held for a long period of time. The hard money loans although a great product will typically cost a lot of money upfront with fees and are a way to borrow money at a higher rate. Let’s dive into how a hard money loan can be used and evaluate if it is a good product for your upcoming investments!
What Is A Hard Money Loan?
A hard money loan is a type of loan that comes from a private lender, rather than a bank. This means that the lender is taking a bigger risk than banks that have more strict requirements for borrowing money. The loan is secured by an asset, like a house or car, so if the borrower doesn’t pay back the loan, the lender can take the asset. Hard money loans are usually more expensive than bank loans, and are usually only used for short periods of time. So when one is considering a hard money loan they will need to evaluate what they own that they can use as a form of collateral. One example of collateral when someone is wanting to get a hard money loan to start a building project is the land that they own outright. The borrower can use the paid off land to offer as a promissory asset to the private lender who will in return set up a hard money loan with terms.
Basics of Hard Money Loan
Hard money loans are usually offered by private lenders, such as individuals or investment groups. These loans are typically secured by real estate, such as a house or land. Hard money loans are usually short-term, and are typically used to purchase properties quickly or to pay off debts. Because of the risk involved with these loans, the interest rates are usually higher than those of a traditional bank loan. Hard money lenders often require larger down payments than traditional lenders.
Hard money loan requirements
- Good credit: minimum credit score of 620 or higher to qualify for a loan.
- Proof of income: and/or assets to qualify for a loan.
- Collateral: such as real estate, to secure the loan.
- Cash reserves: borrower have at least three months of reserves in the bank
- Business plan: to understand the borrower’s goals and the purpose of the loan.
- Reasonable loan-to-value ratio: Most lenders want a loan-to-value ratio of no more than 70%. This means that the borrower can borrow no more than 70% of the value of the collateral used to secure the loan.
When trying to get a hard money loan, a borrower will need to provide a variety of documents to the lender. These documents will include proof of income, a credit score, and a list of assets. Additionally, the borrower may need to provide information about any recent or past financial issues, such as bankruptcies, judgments, or liens. The borrower will also need to provide additional information about the property or assets being used as collateral for the loan. This includes an appraisal, photographs, and any relevant inspection reports. Finally, the borrower will need to have a clear understanding of the terms and conditions of the loan, including the interest rate, repayment schedule, and any fees associated with the loan.
What can Hard Money be Used For?
Hard money is an alternative source of financing for a real estate purchase or refinance. It is usually a short-term loan, usually for 12 months, with a higher interest rate than a traditional mortgage loan. As a borrower new to the real estate world, hard money can be a great option for projects that require quick access to funds. It can also be used to finance a property when financing from a traditional lender is not available, or if the borrower has a less than perfect credit score.
Hard money can also be used to cover the costs of a project, such as the purchase, renovation, or repair of a property. Finally, hard money can be used to bridge the gap between a current and future loan, or to make a cash offer on a property. When used properly, hard money can be a great tool for a new real estate investor.
Loans for Flipping A House
A fix and flip loan is a type of short-term loan that is used to purchase and quickly renovate a property before reselling it for a profit.
The loan is typically made up of two parts:
Part I: Loan to purchase the property
Part II: Loan to finance the renovations.
Someone or a business can acquire a fix and flip loan by applying for one from a financial institution such as a bank or private lender. The lender will review the applicant’s assets, credit score, and financial history to determine if they are a good candidate for the loan. The lender will also consider the proposed purchase price and renovations needed to complete the project. If approved, the loan can typically be funded quickly, allowing the borrower to begin the process of purchasing and renovating the property. Often these types of loans are considered in house loans for banks. The most advantageous way to find these is to call banks, have your information to include property address, understanding of the cost of your renovations, and a way to convey your financial situation to the bank. Upon contact you can give the bank this information and have a quick conversation if they offer anything in this nature and what all of their requirements are. With these types of loans being in house, remember to shop around for not only the rates but all other terms and conditions each institution will offer to get the best loan!
Loans for Purchasing Investment Property
Hard money loans can also be used to finance the purchase of residential investment properties that are intended to be rented out. For investors who are looking to acquire rental properties, these loans can provide quick financing to make competitive offers on properties that are in high demand. In some cases there are hard money lenders who will allow longer terms for the lending to buy rental properties. It is important to look at the rates and terms of the loan if there is any intent on keeping it more long term. With the interest rates, and qualifying factors needed for more conventional lending it is important that a borrower is planning on keeping a loan long term they negotiate the terms upfront vs. waiting until later which may put them in a bind as some hard money lenders do not want to loan money for longer term as they make their money off of fees and interest from the front end of the loans.
Loans for Purchasing Commercial Property
In addition to residential properties, hard money loans can also be used to finance the purchase and construction of commercial properties such as office buildings, retail spaces, and industrial warehouses. Commercial properties are typically more expensive than residential properties, and lenders may require a larger down payment or collateral. Private lenders can provide this larger down payment and also even be used to bridge the gap between the purchase of a property and the time it takes to secure permanent financing. In the case of a commercial property purchase, this could mean using a hard money bridge loan to purchase the property, renovate it, and then secure long-term conventional financing once the renovations are complete.
Hard money loan rates
Finding a rate for a hard money loan involves a few steps. First, the borrower should evaluate their needs and determine how much money they require and how long they need to borrow it for. Then, they should research different hard money lenders and compare rates, terms, and fees. They should also consider the reputation and experience of the lenders they are considering. Finally, the borrower should negotiate with the lender to ensure they get the best possible rate. Hard money loans are typically provided by private lenders such as real estate investors, private lenders, and investment firms.
Parties involved in hard money
There are three primary parties involved in the hard money process: the hard money lender, private investors, and borrowers.
When involved in the loaning process, a hard money lender performs several key functions.
These include:
Underwriting: Lenders review loan applications and evaluate the borrower’s creditworthiness, income, and other factors to determine if they are a good candidate for a loan.
Funding: Once a borrower has been approved for a loan, the lender provides the funds needed to complete the transaction.
Servicing: Lenders typically service their own loans, meaning that they collect monthly payments, manage escrow accounts, and handle other administrative tasks related to the loan.
Foreclosure: In the event that a borrower defaults on a hard money loan, the lender may initiate foreclosure proceedings to recover their investment.
Investor relations: Some hard money lenders work with investors to fund loans. In these cases, the lender is responsible for managing the relationship with investors, communicating the terms of the loan, and ensuring that investors receive their expected returns.
Hard Money Lenders
The main difference between a hard money lender and a conventional lender is the type of loan they provide. A hard money lender focuses on providing short-term loans, usually secured by a property, for a higher interest rate than a conventional lender. A conventional lender focuses on long-term loans, usually unsecured, for a lower interest rate. Convention lenders can be found in banks, credit unions, and mortgage lenders.
Private Investors
A private investor is an individual or group of individuals who invest their own money in real estate and mortgages, generally in the form of hard money loans. Private investors provide funding to borrowers who cannot obtain financing through traditional lenders. Private investors typically charge higher interest rates due to the high risk associated with these types of loans. Investors typically have high net worth in excess of $1 million and are looking for alternative investment opportunities to diversify their portfolios. Private investors are often referred to as “angel investors” because they are providing capital to borrowers who may not have access to other funding sources.
Borrowers
Borrowers are individuals or companies who receive hard money loans. They typically use the loans to finance real estate investments, with the intention of paying the loan back when the property is sold or refinanced into a new mortgage. Borrowers may include real estate investors, homeowners, developers, or business owners looking to purchase a commercial property.
Average Length of Hard Money Financing
The length of hard money financing can vary depending on the lender and the specific project. Some lenders may offer longer terms of up to five years, while others may only offer short-term loans of six months to one year. The length of the loan will depend on the borrower’s needs and the type of project being financed as well as the underwriting requirements of the hard money lender. The length of the loan should be negotiated upfront, it is never good to be in a bind and have to start your hard money loan over because you have not already secured the financing after the hard money loan terms run out.
Advantages and disadvantages of hard money loans
Hard money can be a valuable financing option for real estate investors, but they also come with certain advantages and disadvantages. Here are some of the key pros and cons of using hard money:
Advantages:
- Fast funding: These loans can be approved and funded much more quickly than traditional loans, which can be especially valuable in competitive real estate markets.
- Flexible financing: Hard money lenders have more flexibility in terms of loan terms and underwriting criteria compared to traditional lenders. This can make it easier for borrowers to get approved for a loan, even if they have a poor credit history or other financial challenges.
- Asset-based lending: Hard money loans are secured by real property, which means that lenders have a tangible asset as collateral in the event that the borrower defaults on the loan.
- No prepayment penalty: Many lenders do not have a prepayment penalty, which means that borrowers can pay off the loan early without incurring additional fees.
- High potential returns: Loans typically come with higher interest rates and fees compared to traditional financing, which can be attractive to investors who are looking for high returns on their investments.
Disadvantages:
- Higher costs: They typically come with higher interest rates and fees compared to traditional financing. This can make them a more expensive financing option in the long run.
- Short-term: They are typically short-term, ranging from a few months to a few years. This can be challenging for borrowers who need longer-term financing options.
- Higher risk: The assets being bought are typically considered higher risk compared to traditional financing. This is because they are often used to finance riskier real estate investments and because the terms and underwriting criteria are more flexible.
- Limited availability: Hard money is not widely available, and are typically only offered by certain lenders and investors, which can be hard to find.
- Foreclosure risk: If a borrower defaults on a hard money loan, the lender may initiate foreclosure proceedings to recover their investment. This can be challenging for borrowers who are unable to make their payments on time.
How to Get A Hard Money Loan
Finding hard money loan lenders can be a daunting task, but there are several resources available to help. The first place to look is online. There are many websites that list hard money lenders, and you can often find reviews and ratings of different lenders. Additionally, you can search for local lenders in your area by asking friends and family for recommendations. Finally, you can contact a real estate broker or mortgage broker who may be able to connect you with a hard money lender. No matter which method you use, it is important to do your research and make sure you are working with a reputable lender who can provide you with the best terms and conditions.
Alternatives To Hard Money Loans
Alternatives to hard money loans include traditional bank loans, private money loans, and bridge loans. Traditional bank loans are the most common type of loan and are typically used for long-term financing. Private money loans are typically provided by individuals or companies and are often used for short-term financing. Bridge loans are short-term loans that are used to bridge the gap between two financing sources. All of these loan options have their own advantages and disadvantages, so it is important to do your research and find the loan that best fits your needs.
The basics of understanding the makeup of the hard money loan is spelled out for you now. Before you go out and get one of these loans make sure that it works with your portfolio. It is always a good idea to start researching early and building relationships with private lenders so when you do find that perfect deal you already know what type of terms and conditions your established relationship with a private lender will be! If you decide you want to use the hard money loan make sure to update your documents often with the private lender and follow up on terms and conditions in this changing environment. Just like conventional loans the private lenders will have fluctuating terms and conditions to maximize their money too!
ADPI Pro Tips
- Do your homework. When you are going to borrow money from a private lender, remember to read over the terms and conditions. If you have a plan to pay the loan off early make sure that you ensure there are no prepayment penalties. If you have a plan to gain conventional funding for a longer term position, start that early so you do not have to get another hard money loan. Doing your research and putting yourself in a long term position is much better to do upfront and will save you a lot of money in the long run.
