Want to flip a house or invest in rental property? But the banks won’t provide you with the traditional loan? There could be many reasons for the same, maybe the finances don’t meet their standards or your credit history is not potent or you just don’t want to wait for 30-45 days to get the money, that’s where hard money lenders step in.
What are Hard Money Lenders?
In simple words, hard money lenders are private investors or companies who will take the final call based on your credit and your debt-to-income ratio. These lenders are ready to finance you because they are betting on the deals, i.e, they are betting on the property. Hard money lenders need to know that you have enough equity so that it is a safe bet for them.
What is a Hard Money Loan?
A hard money loan is a short-term or a “last resort” loan primarily used for real estate transactions. This type of loan does not come from a traditional institution like banks, but rather a private investor or a private company assumes the property as collateral for the money they are lending to the borrowers. Like traditional mortgages, a hard money loan is a secured loan that is assured by the property it is used to purchase. You guessed it right! If you default, the lender can take over its ownership.
With a traditional mortgage, you have to pay a certain down payment, you have to fill a ton of paperwork and on top of that if they avail you the loan it takes weeks or even months to close. The benefit is you get a loan with a low-interest rate and a large number of periods to repay.
On the flip side, hard money lenders evaluate the property being purchased and then approve a loan. They may do a quick credit check but certainly, there is less or even no paperwork at all. The beauty of hard money lenders is that they can close quickly. Due to the minimal procedure, a lot of these hard money lenders can fund a deal in 7 to 14 days!
However, just because a hard money loan is available in a short period doesn’t mean it’s a good option for everyone.
Interests and Fees on a Hard Money Loan
Hard Money loans come with a higher interest rate, typically 9% to 12% as compared to banks’ 2% to 3%. On top of that, they are also going to charge some points (2% to 4%) as an upfront fee and 1% of the loan amount is a point. This is the only way hard money lenders can justify lending money at looser terms than banks. Lenders take on a significantly bigger risk and they have to be compensated for the added risk. Hard money loans also tend to have a short repayments period- typically 6 to 12 months. It ain’t cheap! That’s probably the reason why a lot of people hate hard money. But think of it this way; you’d rather pay for expensive money than not do a deal at all.
If one factor in these above costs in the flip and the flip still makes what it is expected to make even after paying the lenders, what does one care about expensive money? Remember 50% of something is better than 100% of nothing. Just get over the fact that hard money is expensive if it’s the only way you can get a deal.
To assess the lending risks, the lending companies will also use a term called Loan-to-value ratio (LTV). LTV refers to the proportion of the property that is mortgaged and the amount that you own. Essentially, they are willing to lend anywhere from 70% to 80% of the LTV. So if the value is $100,000, the lenders are only willing to give a 70% of the value, i.e. $70,000. The other part is the down payment. Hard money lenders also require a down payment, let’s say 20%. That means you will pay $14,000 as a down payment. What remains, $56,000 is the loan amount on which they will charge interest and points.
What are Hard Money Loans Used for?
There are several reasons why hard money loans are used, let’s look at a few:-
Flip a House:
Real estate investors purchase low-cost properties that either need fixing or show a potential profit, repair and renovate them and sell them for profit. This is known as flipping the house.
These projects happen quickly- under a year, hence professional flippers prefer faster financing methods. Since the selling period is short, they seek hard money lenders as opposed to traditional banks.
Purchasing Investment Property:
You buy a rental property, find tenants, and collect monthly rent to maintain facilities. Buying rental property is different from buying a house in the sense that the end goal is to make a profit.
Investing in rental property can prove to be a good source of income and profit if executed well. Generally, investors who can’t get approved for a traditional loan turn to a hard money lender.
Purchasing Commercial Real Estate:
A business owner might turn to hard money lenders to purchase commercial real estate to provide residential property, office space, entertainment like hotels or to host industrial operations. A hard money loan is an alternative as banks may not be willing to finance a vacant property.
Hard Money Loan Risks:
The hard money lender takes a bigger risk but the borrower is also at risk. If the property is not profitable as anticipated, the borrower might face a hard time repaying the money because of the expensive hard money and high-interest rates. This could lead to borrowers losing the property or even going completely broke to pay off. The lender could also turn out to be a cheat. Some lenders will offer great terms and low interest rates only to change them at the last minute. This phenomenon is known as “bait and switch” tactics.
Hence, real estate investors should only work with hard money lenders that have a good reputation and should review all the loan documents and agreements. A broker can help you connect with the right lender and get you better loan terms. Hiring a broker who will take care of the necessary documentation will speed up the process and get your loan approved. Although a broker will cost you a broker’s fee ranging from 1% to 4%. But if the broker can get you lower interest rates, it is a good deal.
Where to Find the Hard Money Lenders?
The easiest way of finding hard money lenders is Google. A lot of them are advertising on Google Ads. All you need to do is search “hard money loans” or “hard money lenders” and you will get a bunch of options to choose from.
However, you need to know that there are two different types of hard money lenders – National and Local. National Hard Money lenders have a huge pool of money and can lend it out at cheaper terms. They will provide you with a better deal.
Here’s a list of the top 5 best hard money lenders in the industry:
- RCN Capital
- Lima One Capital
AnchorLoans and CIvic are also among the reputed hard money lending companies. They have different products, good rates, and terms for not only experienced professionals but inexperienced people as well. However, the procedure will be strict for the latter.
The best way to find the one for you is to visit their website, review the loan amounts, interest rates, and minimum credit score.
The other route is the Local Hard Money Lenders. What you would want to do is simply Google “hard money lenders” and then put your city name. For example, “hard money lenders Florida” or “hard money lenders New Jersey” and a bunch of local lenders should pop up. Typically the local lenders will be more expensive but they will provide more flexible terms as they know their market better.
Is It Advisable to Go for Hard Money Lenders?
For those who seek a loan through less traditional routes, hard money loans can be useful to them. However, if the investment does not work out the way it was supposed to be, it can drain the borrower till they are completely broke. Make sure you’ll be able to afford the interest rates and fees and that you’ll be able to repay the loan if you choose to finance a deal with hard money.
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