Like many things in business, the first place to start to ensure any process goes smoothly is proper planning and expert providers. In the case of hard money loans, this planning is relatively simple and painless compared to traditional loans. With this guide, you will learn everything you need to know about obtaining a hard money loan and working with hard money lending. The first step is determining what type of project you are funding and your exit strategy for that loan.
What Types of Projects Are Hard Money Loans Used For?
Hard money loans are generally seen as alternative options to traditional loans or short-term bridge loans for a lot of financial transactions. They are primarily used in real estate transactions and put down as collateral to secure the transaction.
Fix and Flip Loans
A fix and flip loan is one where the purchaser is investing in a property in order to renovate and resell the property at a profit. Hard money loans are very popular with fix and flip loans as they allow the borrower to secure funds quickly in order to purchase available properties in a competitive property market. The exit strategy for these loans is to repay the borrowed amount with the profit from selling the property.
Buy and Hold Loans
A buy and hold loan is one where the purchaser is investing in a property in order to maintain ownership, often for the purpose of renovating the property and then listing it as a rental. The exit strategy for buy and hold loans is typically to refinance the loan into a traditional mortgage once renovations are complete. This is sometimes called the “buy, rehab, rent, refinance” approach. In the case of a hard money loan funding renovations to a property which you already own, this may be called a rehab loan.
A bridge loan offers quick access to capital in order to continue work while securing long-term funding. The exit strategy for a bridge loan is usually refinance.
Commercial Hard Money Loans
A commercial hard money loan is used for multi-family dwellings, industrial, retail, and other commercial settings. The exit strategy for these loans is more likely to utilize business capital or refinance.
The first step is determining what type of project you are funding and your exit strategy for that loan.
What Are the Requirements for a Hard Money Loan?
Regardless of the type of loan you are pursuing, most hard money lenders will require the following information in order to finance your project:
- Cost of initial property acquisition and purchase contract.
- Estimated After Repair Value (ARV) of property.
- Proof of funds for down payment on the loan.
- Proof of income
The lender may utilize factors such as appraisal, purchase price, and nearby property values in order to determine the Loan to Value (LTV) of the borrower’s property. First loan terms and fees for things like appraisal, taxes, and legal fees will be determined. Then once terms are set, the broker will move forward with determining the LTV. With a high quality lender, nothing should seem hidden or unknown. Any reputable hard money lender will clearly communicate to potential borrowers what their process for application and lending looks like. Expect the process to move quickly and with clarity.
How Long Does It Take To Secure a Hard Money Loan?
Non-consumer hard money loans can close in a little as 2-3 days. This is because hard money loans specifically designed for businesses have the least amount of regulations. So, if escrow is already open and a preliminary report has been prepared for the loan, it can be funded quickly.
What Is a Hard Money Lender?
A hard money lender is a private entity that provides capital quickly by utilizing loans based primarily on collateral, not credit. These loans are designed to provide cash quicker than traditional mortgages, on a much more short-term basis, and for projects which would be considered a higher risk than many banks would fund with a traditional loan. Because hard money loans operate quite differently than traditional mortgage loans, they are managed by an entirely different type of lender as well.
Hard Money Lenders are private companies who specialize in funding short-term real estate loans using collateral. These lenders may not be traditional banks, but they are still guided by some financial regulations in order to protect borrowers. While some of these regulations are federal, such as any residential bridge loans which might fall under Dodd-Frank, most regulations governing hard money loans are state-specific. This is just part of why it is important to choose a hard money lender who is knowledgeable and reputable!
How to Choose a Quality Hard Money Lender?
Hard Money Lenders should have expert knowledge of local real estate markets and state regulations. For this reason, finding a hard money lender in your area is suggested. Many companies operate in multiple states with specialists in each area. Look for lenders who maintain experienced staff in each area they do business. Your hard money lender will be providing capital based on the real estate value of your property, so look for a reputable lender whose experience encompasses both consumer finance as well as real estate and property investment. Moreover, search for hard money lenders that have the following:
- Staff whose specialty is fiscal and regulatory accountability, such as legal counsel and a controller or comptroller, can protect the borrower against businesses that jeopardize their solvency or legality.
- Qualify as a member of the American Association of Private Lenders. This gives an additional stamp of approval and accountability.
- Considered to be reliable hard money lenders. For instance, it is wise to use local resources such as Better Business Bureau ratings, local business, commerce organizations, and word of mouth recommendations from industry peers who may have also used the lender in the past, to determine this.
How Does Hard Money Lending Work?
Hard money lending is used to acquire investment properties quickly. An easy real estate transaction, hard money lending does not apply conventional standards to extend credit. Most often, hard money lending relates to wholesale funding, fix-and-flip projects, and rental property renovations.
Hard money lending works differently. Private lenders rely on property value, rather than a borrower’s credit based on income, debt, and loan history. While easier to manage than a financial institution, the quick approval process also comes with higher interest rates since hard money lenders are assuming higher risks than a traditional financial institution may approve. Hard money lenders may charge anywhere from 7–15% of the entire loan amount.
Great for investors unable to obtain traditional financing, borrowers usually turn to hard money loans after applications are denied. Funds come from a variety of resources. Hard money lenders often use their own individual assets. A typical private lender commits an average of 65% of the property’s repaired value. Similar to a traditional mortgage, hard money lenders often require a down payment on the property. Interest rates are based on experience, amount of assets, and current debt. Closing costs are also incurred.
Wondering how to find a hard money lender? Do your homework. Start by forming a list of hard money lenders from online research. Reputable hard money lenders set clear terms from the beginning, and many will show upfront proof of funds. Certain needs must be met to obtain a hard money loan, such as:
- Quick qualification
- Knowledge of local real estate market
- Clear loan terms
- A minimal underwriting process
Understanding hard money loans can be helpful when the time comes to select a high–quality private lender. With research about what to expect, the situation may feel easier to navigate. The HardMoney Company is a reputable lender who “checks all the boxes” and is certified with the American Association of Private Lenders. Our website has a wealth of information about the different loan types we offer, our quick process, and our expert knowledge of the market. Please contact us with any additional questions you may have or proceed immediately with our Quick Application form and we’ll be in touch!
What Are the Advantages of Working With Hard Money Lenders?
Hard money lenders create prime opportunities for quick capital. Hard money can also help people get immediate cash out of properties through refinancing options. Common benefits of working with a hard money lender over a financial institution include:
- The quick & flexible process – there’s no one size fits all approach. Unlike a traditional mortgage, approvals from hard money lenders may only take one day! Terms are agreed upon for appropriate down payment, interest rate, and loan duration.
- Fewer Requirements – hard money lending does not involve lots of strict red tape. It’s the opposite of traditional lenders, who look through the entire financial situation, from income to debt, credit history, and assets.
- Rapid Funding – hard cash is easier to secure than from traditional lenders.
- No Pre-Payment Penalties – traditional institutions charge when circumstances change. Hard money lenders typically structure loans without added fees.
- Low Credit Accepted – hard money lenders base decisions on property value rather than credit. Investors with a credit score of 620 or higher are typically approved.
What Are the Disadvantages of Working With Hard Money Lenders?
Quick and easy isn’t always the way to go. Borrowing money can be a risky move in any situation. It’s important to note that a borrower cannot reside in the property being funded. What are a few other drawbacks to hard money lending?
- High Interest Rates – hard money lenders are expensive compared to traditional mortgage options. Points and fees can quickly eat up your total profit.
- Short-Term Duration – hard money lending is intended to be paid back within 12–24 months. Extensions come with hefty fees.
- Required Down-Payment – rather than a traditional mortgage, more upfront money can be required for hard money lenders.
Interested in how to get a hard money loan? Do your research and know the worth of your project. Use educational resources to avoid the consequences of falling into a bad situation with hard money.
The Bottom Line
Hard money lending can work out well for investors seeking less traditional financing options. In exchange for instant gratification, borrowing hard cash comes with high costs. If you want to achieve higher rates of return on rentals or fix-and-flips, be sure to weigh the many pros and cons. Find out more about hard cash lending here.
The Hard Money Company Experience
Here at The Hard Money Company we pride ourselves in providing the same clarity and expert guidance to our repeat high finance customers as our first time consumers. After each application the lender has a phone consultation to ensure your hard money loan is tailored to your individual needs as quickly as possible. Next we will visit your site and order an appraisal. Our streamlined process and experienced staff mean loans are completed with precision, usually in mere days. You can speak to one of our experienced staff members for further information by contacting us today!