By Lonnie White
TOPICS OF DISCUSSION
What exactly is a Hard Money Loan?
Should I use Hard Money Loans for my Real Estate Investments?
What are the general terms for a Hard Money Loan?
How do I get approved for a Hard Money Loan?
Acquiring a Hard Money Loan is simple but may be quite costly. Nonetheless, utilizing such a loan can enable you to leverage your capital and grow your Real Estate portfolio very quickly. In this article, I'll be discussing the ins and outs of Hard Money Loans so that you can determine whether Hard Money is right for you.
What exactly is a Hard Money Loan?
A Hard Money Loan is a short term, secured loan, typically provided by a private individual or company rather than a traditional lending institution. Hard Money Lenders loan their money based on the asset which is taken as collateral. This means that the Hard Money Lender secures first position on the property until they're fully compensated from the borrower. Hard Money Lenders are able to fund very quickly, sometimes within as little as 2 days. This quick turn around is extremely convenient for Real Estate Investors looking to secure a property in comparison to the lengthy duration of a traditional mortgage process. For many, Hard Money is a key component of their fix and flip REI (Real Estate Investment) strategy.
Should I use Hard Money Loans for my Real Estate Investments?
The golden question for many Real Estate Investors...Is Hard Money for suckers or should I be using it? Well, utilizing a Hard Money Loan has to be strategic. If a bank is willing to loan you capital, it usually makes more sense to go with them because of the lower rates. In most cases though, banks aren't willing to loan on an investment property. The loan criteria required by these traditional institutions are usually strict, and are more so geared toward properties not in need of much renovation. Therefore, when dealing with an off market investment property, most likely the seller will require you to pay in either cash or Hard Money with no financing contingencies. Leveraging Hard Money Loans will come with a cost, but for those without a perfect credit score and millions in the bank, Hard Money is the perfect tool to leverage the capital they do have. Below I have listed some of the biggest advantages of Hard Money Loans.
Hard Money Lenders fund very quickly (Little as 1-2 days)
Hard Money Lenders don't always check credit
Hard Money Loans are NOT strict like traditional loans
Hard Money Loans can be used for properties in "as-is" condition (Ugly homes)
Hard Money Loans base their lending off the asset & the deal
Hard Money Loans can provide up to 100% funding including the renovation cost
What are the general terms for a Hard Money Loan?
As previously stated, Hard Money Loans are unlike conventional loans in the sense that they don't require good credit, and they also aren't as strict with their underwriting guidelines. In this section we'll discuss the standard terms for this source of funding in addition to some of the variances you may encounter.
1. LTV (Loan to Value): Most Hard Money Lenders will loan between 65%-85% on the cost of the property. This means that as the investor, you will need to come up with the difference. There are some Hard Money Lenders willing to loan 90%-100% on the cost of the property but it's all circumstantial. Also, most Hard Money Lenders will loan the full rehab cost as well.
2. Interest Rate: Most Hard Money Loans will be at an interest rate of 12%-18%. These percentages differ depending upon both the Hard Money Lender and the deal. In addition to the interest rate, Hard Money Lenders will charge points (usually anywhere from 1-6 points).
3. Inspection: Most Hard Money Lenders will require an inspection either by themselves, or an inspector whom they work closely with. Generally, a Hard Money Lender will not require an appraisal on the property; it is not typical for an "as-is" investment property to have a certified appraisal conducted prior to sale.
4. Additional Fees (Varies depending on the lender):
- Application fees
- Title fees
- Document processing fees
5. Term: On average, Hard Money Loans carry a term of 6-14 months.These short term loans typically have no prepayment penalties. More often than not, a borrower can negotiate terms with a Hard Money Lender.
How do I get approved for a Hard Money Loan?
I'll give you the money for the deal, you're approved. This is pretty much how your conversation should go when working with a Hard Money Lender. Reason being, it's pretty straightforward unlike working with a bank. Banks will request a ton of documents and have you wait weeks before providing you with an answer. Hard Money Lenders just get straight to the point: 1) The deal makes sense & these are my loan terms 2) The deal doesn't make sense go find a better one. Another factor which contributes to an acceptance is the strength of your relationship. A lot of Hard Money Lenders are just ordinary people as opposed to banks which are institutions. Introduce yourself to some lenders and generate a decent amount of rapport. This interaction will provide you with an understanding of what type of deals they're looking to lend on. It will also make the Hard Money Lender more comfortable working with you. Now moving onto the actual process -- Obtaining a Hard Money Loan will begin with an application. Although the requirements vary from lender to lender, it is almost certain that each lender will have you complete a form with some basic information. Listed below are some pieces of information they may request.
- Tax returns
- Bank Statements
- Copy of Drivers License
- Credit check (Not all lenders check credit)
- Property Address
- Investment Exit Strategy
Although the Hard Money Lender will request this information, the most important contributing factor to an acceptance will always be the property. A Hard Money Lender will NOT lend money on a property if they think it's a BAD DEAL! There are few Hard Money Lenders who will maliciously lend with the expectation of failure but the majority of lenders will avoid a bad deal at all costs. Run your numbers, run your comps, and develop a solid exit strategy. Hard Money Lenders want to make sure you're capable of successfully executing.
Conclusion
Hard Money Loans are an excellent way to leverage your capital to grow in real estate. Many people successfully profit off of deals using Hard Money. Be strategic with what you borrow and you'll be just fine. Remember, real estate investing always and I mean ALWAYS needs to be a calculated decision making process.
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