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What are hard money lenders?
Private investors who lend their money at high rates that local banks won’t accept.
Hard money loans are easier to obtain and are financed very quickly at the speed of light. It is especially known among real estate investors as asset-based loans. The collateral for the loan becomes the property. They are far from conventional loans, as the underwriting guidelines that private money goes through are very different from those of your local banks.
For those looking for emergency funding sources, or who have time-sensitive situations and need to quickly close in days, not weeks, for their money, hard money is a solution! Credit scores or bad credit is not a factor in most cases, although there are hard money lenders that do look at the credit history of borrowers and are credit based, but for the most part they are not based lenders. in credit.
Based on their own lending criteria, HMLs lend money on a short-term basis, from 6 months to 1 year, to borrowers who use it for a variety of profitable purposes. These can include the following types of real estate loans: bridge, refinance, development, acquisition, rehabilitation, etc. Since hard money is more expensive than traditional sources (interest rate of 14% or more and 2-10 points or more in origination fees), borrowers typically make a financial gain from using hard money, so the high interest or points are usually offset by financial gain. Borrowing cost is not an issue when you can earn $150k and pay $30,000 to use your money, would you use it if you could earn $150k and pay $30k to use it?
What kind of terms can you get with hard money loans?
These types of loans will vary from one private lender to another. The initial application fee, due diligence fee and commitment fee may be charged and vary from lender to lender again. Typically, they will finance a loan of 50% LTV on the raw land and up to 50-70% LTV on the finished product, at an interest rate of 14% or more (depending on the area of the country in which you live). you meet). and for a period of six months to three years. They will also charge between 2 and 10 points as an origination fee, which will be paid from the proceeds. It can be interest only or amortized.
Some lenders will finance interest, origination fees, rehabilitation money, etc.; others will not. Ultimately, when selecting an HML, borrowers will need to understand how these options best fit into their plans.
What makes private money an excellent financing source and option?
Your local banks, credit unions fill a definite need for money at low cost. Borrowers would love to use them for all their real estate needs and deals. However, there is a market where traditional lenders cannot lend money. That’s where private money comes in and why they exist. They fill a need that local banks cannot fill due to government regulations, stricter underwriting guidelines, lower risk profiles, longer funding schedule, etc.
Top 10 reasons to consider when deciding on hard money loans
1. SUPER FAST SPEED
You can close in 5-14 days after getting all the necessary paperwork, banks can take up to 45-60 days.
2. DOCUMENTATION REQUIREMENTS ARE EXTREMELY LOW
Requires documentation, but not as much as traditional lenders, finances only based on the value of the property and not the creditworthiness of the borrower.
3. BAD CREDIT IS NOT A PROBLEM
Bankruptcy, foreclosure, and a FICO score of less than 490-600 are not a problem. Traditional lenders almost always require an excellent credit history.
4. VERY FLEXIBLE
Flexibility with loan structuring…amazing! Terms, interest reserve, drawing schedules, cash withdrawal, transfer of financing, etc.
5. GAP/BRIDGE FINANCING
HMLs are typically very experienced real estate lenders who understand that projects don’t always go according to plan. If there is a gap in financing and the loan and supporting documentation make sense, HMLs will generally finance. Whereas, IL guidelines are generally not flexible and reject gap loan applications if borrowers fall off schedule.
6. FOREIGN NATIONAL LOANS NO PROBLEM
Foreign nationals can get a loan from a hard money lender, but it will be difficult to get a loan from a traditional lender that has trouble lending to non-US citizens.
7. WILL LEND IN HIGHER RISK OPERATIONS
Nonprofit churches are not a problem with hard money lenders, but they are with traditional lenders who are concerned about foreclosing on a church loan and the bad publicity they will receive.
8. PERSONAL GUARANTEES NOT REQUIRED
Loans based on the value of the property so no personal guarantees are necessary. Local banks always require personal guarantees.
9. FLEXIBLE LOAN TO VALUE (LTV)
They are more flexible than traditional lenders, as they will decide which Loan-to-Value (LTV) they will accept based on their affinity for the project, cross collateral, possible equity participation, etc. Traditional lenders will turn down loans as soon as possible if the LTVs are too high.
10. SUBORDINATED LINKS
Hard money lenders will lend at a rank 1, 2, 3 or lower, as long as the value of the property is there. Local banks can do a second and almost never a third. In general, traditional lenders always want to be in the first position.
What should you expect with a hard money loan?
If you have a fantastic offer on a super LTV and can’t get to a local bank due to bad credit or need financing in two weeks or faster. Now that you know and are informed about what hard money is and the value of the concept, you can send the loan to a private lender. You will pay more money for the final result of the loan than your local banker, but it will be easier and faster to close your deal.
Each deal is case by case, unique; terms vary and each deal structure can be different. Lenders’ criteria are adjusted based on the details of each deal, so borrowers will need to be flexible.
Here are some things to keep in mind when applying for a hard money loan:
*Title insurance is required
* All delinquent taxes, lawsuits, etc. and other links in the property will generally be removed from revenue unless specifically excluded.
* Insurance will usually add lender as co-insured
* Funding control is always set on construction, development, and any loan that has a budget * Borrower will pay all closing costs, fees, etc. out of income
* Many lenders require that the property be placed in a single asset LLC, to which the loan is made
* Borrower must be prepared to assign rents
* Interest, in most cases, at least in part will be reserved or prepaid
* Some HMLs require an upfront application fee, due diligence fee, and commitment fee. Make sure you understand these fees and how they will be used and if they are refundable
* Almost all lenders require borrowers to have money on the deal. Additional collateral may be required by cross collateralizing other properties to maintain acceptable LTV.
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