Hard Money Loans: What to Look for

Sep 10, 2021

Hard Money Loans

What is a hard money loan and what does it entail?

Hard money loans are short-term real estate loans that are collateral based and secure the lender's interest with real estate. The "hard" stands for hard assets. Hard money loans can be utilized by people to “Fix & Flip” properties, do hard money construction loans, or to get funds out of a current property.

With a hard money loan, since the lender is taking the risk, the interest rates tend to be higher than a bank loan. Because hard money lenders secure their loans with real property as collateral, they are evaluating the borrower's equity in the property. The maximum amount of hard money a lender is willing to extend, or leverage, is based on the percentage of the property's value.

Hard money lenders are most concerned about the loan to value (LTV), that is the loan amount divided by the value of the property. The benefit to the borrower is that they stand to make a strong profit once they complete their rehab project within the time allotted for their note.

How Does a Hard Money Loan Work?

The time it takes to qualify and get a hard money loan is much faster than a bank loan.

The hard money loan process is relatively short since hard money lenders do not spend time with stringent conventional bank criteria for loan approvals. They focus on sound real estate investment and business models. Most first-time borrowers are surprised to learn their credit rating is not one of the main criteria to get a loan.

This is where Hard Money lenders differ from other conventional lenders. With a Hard Money Company loan, the borrower receives the money directly, as opposed to other companies that broker out a loan. Because the loans are collateral based, they are secured against investment properties that are submitted to purchase or already owned, and are handled quickly.

It is important for the client to remember that collateral, the amount the borrower contributes towards the purchase, location of the property, and—for cash out loans—the equity in the property are the determining factors for hard money loan approvals. Typically, clients provide 10–30% cash down. Primary residences can very rarely be used to get a loan, with the exception of a bridge loan or the money is being used strictly for  business purposes. Once approved, points are generated for acquiring the loan but because a hard money loan is not conventional, these percentages can be discussed with the lender. Hard money loans have terms between 12–24 months and include additional fees such as legal, tax and appraisals. Once the terms and fees have been decided then the property will be given a valuation. This is generally determined through a Broker Price Option (BPO) or an independent appraisal.

When Should I use a Hard Money Loan?

People use hard money loans for several reasons. The first is speed. If a borrower is looking to move on a property quickly and cannot wait for a conventional loan to be approved, a hard money loan is a great solution. Hard Money lenders are sometimes able to make their underwriting decisions and issue terms on the first call. Some states such as Florida take longer. Another reason is past credit issues. A hard money lender is willing to overlook past credit issues such as foreclosures, late payments, and bankruptcy. They have less stringent underwriting guidelines which allows a much faster loan process. This is an important piece for borrowers.

Pros and Cons of Hard Money Loans

The positive aspects of working with a hard money company are, you work with the private lender directly, less requirements to get a loan, speed, decisions based on profitability for the borrower and lender. Frequently the decision on the loan approval is based solely on the asset value and the contribution from the client.

A hard money loan is not for you if you are looking for a personal loan, a primary mortgage, or debt payoff. A Hard Money loan requires a property as an asset.

How Are Hard Money Loan Rates Set?

Setting up any type of traditional  loan almost always starts with the lender reviewing the borrower’s financial information and credit worthiness to see if they think the borrower will be able to pay back the loan in a reasonable amount of time. The lender also considers whether the potential reward of making a profit through payback plus interest is worth the risk of being only partially paid back or not paid back at all. However, with a hard money loan, the lender often doesn’t look too closely through financial documents at all and there is a much quicker turnaround time. This is, in part, due to two reasons, the first being that they often come from private lenders which often have less red tape, and the second being the borrower puts up property as collateral.
 
Even with collateral, the lender is still giving out money with a possibility they won’t be paid back. Combine this with the lack of financial information the lender likely received from the borrower, and it becomes clear that hard money loans can carry a pretty high amount of risk for the lender. This is why, in order to help mitigate the risk, hard money loan rates are often high, anywhere from 2-10% higher than the interest rate of a traditional mortgage.

What Are The Steps To Getting A Hard Money Loan?

Getting a hard money loan is a much quicker and simpler process than going through a conventional mortgage. The HardMoney Company prides itself in assisting clients with a fast closing and quick approval. The HardMoney Company makes their decisions based on profitability and you, the client. Whether you are interested in a Fix & Flip, Commercial, Rehab, or Bridge loan we have underwriters that can secure your loan. Here is how you need to proceed.

  1. Tell us what you need for your property: Contact Us
  2. Complete our online application: Quick Application
  3. Phone Consultation: We will have a phone consultation to discuss your initial thoughts and if all parties agree, you will receive a commitment letter.
  4. Site Visit: to better evaluate your loan, we will meet you at the property to evaluate and discuss your objectives.
  5. Appraisal will be ordered and a good faith deposit is needed. (In Florida you must order the appraisal through one of our approved professionals). After both parties agree in principle, a good faith deposit will be required. The deposit will be credited towards closing costs.
  6. Settlement Scheduled: We will contact you to re-verify all aspects of the loan and then schedule a closing.