There are many types of loans, but what is a hard money loan? This guide explains everything you need to know about hard money loans.
Each year, a total sales value of approximately 650 billion dollars the turnaround of the house. Yet the biggest hurdle most people face when starting a home turnaround business is lack of capital.
If you were looking to get into house flipping and reap the huge benefits that come with it, how do you get into the market with no money?
Hard money loans have had a bad name for quite some time now, and that’s understandable if you haven’t considered it an option. This guide will explore what hard money loans are and help you understand if you should take one.
What is a hard money loan?
The point is, they are known as hard money loans because the “hard” stands for the asset. However, these are legitimate loan options from lenders looking to fund legitimate projects.
Essentially, when you take out a hard money loan, you have to back it up with collateral. In this case, the real estate in which you want to invest.
Hard money lenders are individuals or institutions that offer short term home loans. They not only work with house pinball machines, but also with developers and private investors in the residential and commercial real estate markets.
They finance all types of properties, from condos to apartment buildings to single family homes. Most of the time, they finance properties in dire need of renovations, repairs, or stabilization that increase the property’s value, and they earn money from interest, fees, and points.
How are hard money loans different from traditional bank loans?
One of the biggest differences is that hard money loans are a bit more expensive.
Hard money lenders are always more interested in the collateral asset than the borrower taking the money against the assets. However, hard money loans are also easier to obtain because the additional expenses make them easily accessible.
You’re also likely to get a more flexible repayment plan and a less strict approval process. Most banks have very strict criteria and arduous approval processes, especially for home loans.
Hard money loans are also approved faster, but they happen to be short term loans that don’t last as long as conventional mortgages.
The approval process also varies widely. Banks are more concerned with your personal debt and credit score, while hard money lenders may be more interested in your property, the economics of your project, or even your experience in the real estate market.
The loan amount is based on two things, namely loan-to-cost ratio and loan-to-value ratio.
Loan / cost ratio: The loan / cost ratio (LTC) implies the total cost of the project, from the purchase price to the rehabilitation cost. Usually, you will get between 70 and 100% of the cost of the project.
Loan to value ratio: On the other hand, the loan to value ratio (LTV) implies the percentage of ARV or the value after repair. It basically means the market value of the property once you are done renovating it. Most lenders offer between 65 and 75% of a loan to value ratio.
How to get a hard money loan
The process of hard money lending begins with the borrower’s loan application.
Once you find a suitable property that has a good offer value in return, you find the best portable hard money lender and complete an admission form and uniform home loan application. These will provide information about the project and demonstrate your background and experience in the real estate market.
The lender will guarantee the loan, which basically means assessing the risk. They will check your credit reports, assess your ability to repay the loan if the transaction is unsuccessful, review the scope of work, and order an appraisal of the property. Once the process is complete, they will either approve or deny you on their own.
If you get the approval, you will wait until the closing date to sign documents like promissory notes and trust deeds. These are intended to secure the investments of the lenders by placing a lien on the property. For example, if you do not meet the terms offered, the lender will claim the property to recoup that investment.
Once you get the money and start your project, you will need to pay interest, fees, and points to the lender. Some people do all “hard money” hard money loans because hard money loan rates can be quite hard to believe. One point equals 1% of the loan and is usually prepaid, but interest rates are paid on a monthly basis.
Requirements for a hard money loan
You already know that eligibility for a hard money loan does not necessarily depend on your credit score. So what are the hard money loan requirements? The first thing you need is the down payment or the equity in the property.
Typically, hard money lenders charge 25-30% for residential properties and 30-40% for commercial properties. You can also use cross collateral, which means using multiple properties to get a loan. The lender may also require that you have the financial strength to make monthly loan repayments and an exit strategy.
Typical hard money loan rates
Various factors determine hard money loan rates, including the location of the property, the type of property, the length of the loan, and the experience of borrowers. Excellent hard money loan rates range from 6-8%, good rates 8-10%, standard rates 10-12%, expensive but acceptable rates 12-14%, and higher very expensive rates at 14%.
Benefits of a hard money loan
Business hard money loans have several advantages, some of which include quick qualification and clear loan terms. Beyond that, they have a minimal subscription process, fast approval rate, flexible repayment plans, and in-depth analysis of the details involved.
Disadvantages of a hard money loan
There are also disadvantages to the advantages. Some disadvantages of hard money loans include high interest rates, appraisal requirements, large points and fees, and the fact that they are short term.
How To Find Hard Money Lenders
To find a hard money lender, you must first clarify your expectations. Consider how much down payment you’re willing to make, how long your preferred loan is, when you plan to sell the property, who you’ll hire for the renovations, and how much of work that you are personally prepared to devote to it.
Once you know what you want, one of the best ways to find a lender is to use the Internet. Of course, you can always ask your friends and family for recommendations, as well as other real estate investors in your area.
One of the most important things you should do is choose a lender that is transparent with the terms of the loan. If the advertised rates are different from what they are actually offering, it would be prudent to switch to another lender. They must be licensed in your state and must have a proven track record in offering hard money loans.
It is also essential that you find a lender with whom you can build a long-term relationship. Even if this is your first time investing in real estate, it could be one of the many that you will buy in the future. Having a lender you can count on going forward can be a differentiator.
Even though the process of lending hard money looks similar, different lenders will have different expectations of how much money they pay.
A reputable company will give you clear terms up front and tell you what they want from you for the life of your loan. All of your information should be in writing and you should verify that it will not change during the life of the loan.
100 hard money loans vs homeowner occupied hard money loans
The 100 hard money loans are 100% of the loan you request with no down payment. Lenders absorb greater risk if the amount needed is less than the loan-to-value ratio required. However, the interest rates are higher with these loans, you get extra points and you may have to deal with the first draw of the construction.
Owner occupied hard money loans are offered when borrowers intend to occupy the property. These are rarer because a lot of people don’t understand how they work. Hard money lenders offer these loans as long as they are not intended for personal or family use but for business purposes.
What is a hard money loan? The ultimate guide
What is a hard money loan?
We hope our ultimate guide to hard money lending has answered that question. We also hope now that you understand what to look for in a hard money lender and what to expect during the hard money lending process. We hope you have gained enough knowledge to make informed decisions about your real estate projects.
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