Looking At The Facts And Myths Surrounding Hard Money Lending

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When people want to borrow money in an easy, simplified way, then they may want to consider getting a loan from a hard money lender. People are starting to see the benefits of private loans, particularly with how quickly they can be arranged. Nevertheless, some skepticism is also in order.

Hard money loans can be quite risky. They are very different from bank loans, not in the least because they do not follow the Banking Regulation 2017.

Over the past several years, many regulatory initiatives in the United States derived from the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which was enacted in 2010 in response to the financial crisis of 2007-2009. Many provisions of the Dodd-Frank Act focus on the largest financial institutions due to their perceived role in causing the financial crisis and the perception of such institutions as ‘too-big-to-fail’. The new Trump Administration is expected to seek to modify or repeal certain aspects of the framework implemented under the Dodd-Frank Act.

That said, while it is certainly true that hard money lenders don’t have a standardized process and that they charge high interest rates, they also have some key advantages. This is why it is important for people to be aware of the myths and facts surrounding hard money loans, thereby providing them with an opportunity to make an informed decision.

MYTH: A Hard Money Loan Costs a Lot of Money

FACT: It is certainly true that a hard money loan comes with a hefty price tag. However, it also offers a fantastic opportunity for a high return on investment. Usually, banks and other financial institutions will only provide people with a very low loan-to-cost ratio.

The loan-to-cost (LTC) ratio is a metric used in commercial real estate construction used to compare the financing of a project as offered by a loan to the cost of building the project. The LTC ratio allows commercial real estate lenders to determine the risk of offering a construction loan. Similar to the LTC ratio, the loan-to-value (LTV) ratio compares the construction loan amount to the fair-market value of the project.

Indeed, the LTC is usually between 50% and 65% of the cost of the project. In other words, a developer has to be able to find between 35% and 50% of the funds required somewhere else. In commercial real estate in particular, this could mean millions of dollars.

In contrast, a hard money lender can offer an LTC of between 80% and 90%. This means that there is a far smaller gap to cover. It is true that the interest rates on a hard money loan are a lot more expensive. However, it is also a short term loan, which means that it is easier to obtain a quick return on investment.

Borrowing money is about doing the math. Borrowers must calculate the cost of the loan, which includes the total interest they will pay and the equity they must somehow raise themselves, potentially incurring more interest, and deduct this from the money they will eventually make when their development project is over. Because of the short time frame of a hard money loan and the fact that so much less equity will have to be raised, it is very common to see a hard money loan cost less overall than a traditional loan.

MYTH: You Lose a Lot of Control when You Take out a Hard Money Loan

FACT: It is common for those who want to take out a traditional loan to have to work together with partners in order to raise the additional equity required for the project. What this means is that the lender no longer invests in a piece of property, but rather in an LLC.

Simply put, an LLC is the least complex business structure. Unlike an s corp or c corp, the structure of an LLC is flexible. Starting an LLC also gives you the perk of pass-through taxes, limited liability (obviously), and legal protection for your personal assets.

However, bringing in a partner and forming an LLC often means having to give up partial or even full ownership to the partner.

A hard money lender invests not in an LLC but rather in a property. This means that the borrower remains as a complete owner.

MYTH: It Is Much Easier to Work with a Bank than with a Private Lender

FACT: Just because traditional lenders like banks have a standardized process, they are not necessarily easier to work with. In fact, hard money lenders are often far more flexible and their process is usually highly streamlined as well. If the project is a new development, then hard money loans are generally far more effective. This is because federal regulations make it difficult for traditional lenders to invest in construction.

The commercial real estate market continues to be highly volatile, which means higher reserves have to be held against a project. Additionally, banks must follow the rules and regulations set by the Federal Deposit Insurance Corp..

The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $250,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.

What this means is that the vast majority of construction investors will not have the 1099 income or consistent tax returns they need to qualify. If a loan application is approved, it will be highly conservative. Large banks are concerned about exposure and avoid construction loans as much as possible, preferring to work with customers they already have ties with.

A hard money loan, by contrast, doesn’t have to follow these regulations. While they can also be conservative, their processes are usually much easier to follow and their criteria easier to meet. Indeed, a hard money loan can close in as little as 30 days. Some hard money lenders have such a streamlined process, in fact, that they can have the funds available within 48 hours of receiving a complete application package.

How Can Hard Money Loan Help me with Real Estate Investment

How Can Hard Money Loan Help me with Real Estate Investment

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A hard money loan can be a real game changer if you're hoping to get into real estate and expand your investment portfolio.

An alternative to traditional funding, hard money loans are asset-based. This means borrowers receive loans based on the value of their property. In a country where the real estate market is rising – there were 679,000 new single family homes sold in the first quarter of 2019 in the United States – many people want to cash in on this opportunity. In the last few months, the country's spending on private residential construction work surpassed an estimated $507,231 millions of dollars, and a considerable portion of that could be attributed to home renovators and flippers. Hard money loans offer a great chance to get in the housing market. This is true even if your borrowing history is less than perfect.

What are the Benefits of a Hard Money Loan?

Investing in real estate can be a fantastic and fulfilling endeavor. However, in order to do so you will need some capital. You can't invest in properties if you don't have the funds upfront. That's where hard money lending comes into play. There are many benefits associated with this form of funding. Essentially, hard money loans are awarded based on the value of the property you're purchasing, rather than your credit score and credit history. Generally speaking, people who have been rejected on loan applications through more traditional funding sources such as big banks and mortgage lenders may see success with hard money funding. The application process tends to be easier and more straightforward.

Other benefits of a hard money loan include a quick approval process. If you find a property that you're eager to invest in, you won't be waiting around long once you submit your application for hard money funding. You're much more likely to be approved for this loan compared to asking the bank or a mortgage lender for money. There's plenty of people out there just like you who have wanted to make some exciting real estate moves but have found themselves stuck financially. Hard money loans can be a solid solution that gives you the financial freedom to invest in the right real estate project for you.

Why do People Choose Hard Money Loans?

Last but certainly not least, another reason why so many people are enthusiastically turning to hard money loans is that there are less requirements and restrictions on this funding. You won't have to answer a million questions about your financial situation and your past credit mistakes. Instead, hard money lenders will be looking more closely at the property you plan to buy. The value of this property is very important. Hard money lenders just need to make sure that your investment makes sense. They will also want to know that you will be able to pay back the loan.

How Can You Get a Hard Money Loan?

Hard money loans are extremely helpful for those who want to get into real estate but may not have access to traditional forms of funding. Buying run-down properties and flipping them for a profit is thrilling and rewarding. This is especially true when you get your business blossoming with opportunities coming at you left and right. Whether you're just starting out in the real estate market, or you're a veteran who is ready to try something new, hard money lending could be for you. It's understandable that you may have some more questions, and luckily there are some fantastic hard money funding experts out there who would be happy to help.

In order to secure a hard money loan for your real estate investment, you should search for lenders in your area. Scheduling a meeting with these lenders is a good idea, as you can then have all your questions answered and get a better understanding of what you can expect with a hard money loan. You will also need to provide details on the property you wish to use the hard money loan for. What is the current value of the property and what work are you planning to do to the property to sell it for a profit in a few years time? By demonstrating your real estate plans, you'll be likely to receive approval for this hard money loan that could help you tremendously.

Who Offers Hard Money Loans?

There are some great hard money lenders who are trustworthy and fair and they offer an alternative avenue to funding. These are the types of funding companies that you should want to work with. As with anything, real estate is a huge investment, and it's important to make the best choice for you the first time around. It's likely that hard money loans are the ideal option to achieve your real estate ambitions.

What Else Should you Know?

As with any sort of financial agreement, you should do due diligence and research all your options before signing on the dotted line. While there are so many advantages associated with hard money funding, you also need to be aware of any possible drawbacks that could affect you.

This mainly revolves around interest rates, which are higher than traditional forms of funding. While a mortgage from the bank may offer interest rates somewhere in the range of 3-5%, with a hard money loan you'll be looking more so at interest rates around 8-11%. While these rates can of course vary depending on the lender, it's typical for borrowers to pay more interest on a hard money loan due to the conditions of funding. That being said, this won't matter too much if you stick to your plans of flipping the property and selling at a profit in a few years. Just remember that the interest rates will be higher, and this should factor into your financial planning. You'll also should be pretty sure that your plans for a profit will materialize, so that you end up in the black.

If you're ready to move forward with your real estate hopes and dreams, the next step is to contact a reputable hard money lender to get started on your application. Your next real estate investment could be much closer than you think!

Sources: https://www.huduser.gov/portal/ushmc/quarterly_commentary.html

https://www.census.gov/construction/c30/c30index.html?#

hard money Definition

Hard Money Definition

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What comes to mind when you hear the term ‘hard money’? This term can be used in a number of financial contexts. With the coming of financial technology and increased access to banking for most of the population, hard money is not as popular as it was some decades ago. Interestingly, even with these developments, new reports show that hard money lending is on the rise. Before going into details of how hard money works and what good it is in the market, let’s slice up its definition.

What is Hard Money?

Hard money is used to define a funding stream from a government agency or a donor organization. In this case, it is used to describe a series and scheduled payments as opposed to a one-time award. In another hard money definition, it is just what it sounds – physical currency.

In another definition, hard money is circulating currency whose value ties directly to the value of a specific commodity. Think about notes or coins from precious metals such as gold, silver, and platinum. A good example of it is the Gold Standard.

You can also define hard money as the opposite of soft money. Here, it is perceived as physical cash or fiat money used to make payments, while soft money is either credit or any other money that is not physical or fiat and which is not backed by any commodity. You can also look at soft money as indirect contributions or fees for financial services such as brokerage fee.

The most important definition is in lending. In a lending context, it refers to a  loan that is backed by a physical asset. Unlike traditional lending that considers credit rating and ability to pay, this loan is based on collateral as the lender considers the value of property vs the amount requested.

Let us focus on hard money definition in terms of lending.

What is it Good for?

What is the first thing that comes to mind when most people hear hard money lending? Some people envision a ruthless lender giving out money at sky-high interest rates, or a scam posing as lenders whose interest is in getting the property at a cheaper price from unsuspecting borrowers?

On the contrary, these loans are a fully-fledged industry. According to Forbes, flippers control about $56 billion markets. Private lending stakes about 5.6% of this market share. In 2016 alone, flippers borrowed around $18 billion. It is estimated that a third of these were financed through local land deals by getting hard money loans.

There is a growing demand for credit than conventional banking and mortgage industry can meet. So investors, particularly real estate investors and small businesses take advantage of this gap through private lending – hard money loans.

Hard money loans are good for;

  • Small businesses that are overlooked by conventional banks and lenders
  • People with poor credit rating
  • Real estate investors that need quick cash to take advantage over a deal
  • Construction and land loans
  • Fix and flips

Basics of Loans

In lending can be described as asset-based financing where the borrower gets a loan secured by a property. While the reputation of the borrower matters, hard lenders are solely interested in the value of the property which serves as collateral.

Interest rates for the loans range between 7% and 35% depending on the need, risk, and terms of lending. Hard money loans carry a higher risk to the lender because most borrowers have a low credit rating. This is why their interests are higher. In the U.S., this borrowing is regulated and strictly governed.

Hard Money Loan to Value Ratios

Loan to Value (LTV) is the ratio used to determine the amount the lender will extend to the borrower. It is simply the ratio of the loan amount divided by the value of the property. Hard money lenders should loan up to 65% to 75% of the market value of the property. Some lenders use the after repair value (ARV) to estimate the value of the property. This increases the interest rate instead since it is riskier.

Hard money loans are popular among business people especially in real estate and small businesses. They allow you to save your business during a crisis or take advantage of a quick business deal, especially in property deals. When it comes to hard money definition, we will help you look at lending from all angles.

Sources

https://www.forbes.com/sites/forbesrealestatecouncil/2017/12/05/how-the-rise-of-private-lending-is-reshaping-the-mortgage-market/#6ceb95f452ae

https://www.entrepreneur.com/article/218880

https://www.sba.gov/business-guide/plan-your-business/fund-your-business

https://www.educba.com/hard-money-vs-soft-money/

 

 

 

Big Changes In Mortgages As A Result Of Private Lending

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There are quite limited options available to people who own real estate if they wish to refurbish or if they want to purchase real estate that requires refurbishing. Mortgage lenders do not usually like to take a gamble on a property’s potential worth sometime in the future. The result is a growing demand for private lenders who would be happy to provide fix and flip loans, bridge loans, and refurbishment loans.

Many private lenders are people who were in the real estate investment market themselves and who realized that there is a gap in provision because they themselves experienced to difficulty of getting funds. What this means is that these lenders have a true understanding of the needs of the market and, therefore, have the potential to deliver a relevant and fit for purpose service. So popular are their services now that their market share seems to be growing rapidly.

In 2011, 50 percent of all new mortgage money was loaned by the three biggest banks in the United States: JPMorgan Chase, Bank of America and Wells Fargo. But by September 2016, the share of loans by these three big banks dropped to 21 percent.

Truly determining market share is difficult, however, because the private lending market is potentially huge. One way to look at it is by determining the number of properties that are refurbished and sold on. Another way is to simply determine the percentage of properties that are fix and flippers.

Fix and Flips Across the Nation

According to the latest 2016 Year-End U.S. Home Flipping Report, which looked at counties that are home to around 80% of the country’s population, 193,009 condos and single family homes were flipped in that year, defining a “flipped” property as one that is bought twice within a 12 month period.

ATTOM Data Solutions, curator of the nation’s largest fused property database, today released its 2016 Year-End U.S. Home Flipping Report, which shows that 193,009 single family homes and condos were flipped – sold in an arms-length transfer for the second time within a 12-month period – in 2016, up 3.1 percent from 2015 to the highest level since 2006, when 276,067 single family homes and condos were flipped.

It has also been estimated that if the other 20% of the market was included, there would be a total of 300,000 flipped properties in 2016. Considering that the average price is $189,000, the market is worth $56 billion. That is a huge amount of money, which certainly makes this market very interesting to lenders, particularly because they know that traditional banks aren’t interested in this. There is a huge opportunity for anyone who has the private funds available.

It has also been estimated that around a third of the flips in 2016 were financed. This means that around $17 billion was borrowed in 2016, a significant amount of money. While it is certainly true that determining exact market share is almost impossible, even accounting for standard deviation and mistakes, this share is significant.

Our industry’s uniqueness makes it challenging to analyze market share. We don’t have the standardization of the traditional mortgage market, where most deals flow through a handful of secondary market players who freely share loan-level, portfolio-level and industrywide data.

Unique Characteristics of the US Real Estate Market

The real estate market in this country continues to be unique. There are entire areas where there are far more home buyers than what there are properties for sale. Flippers must act very quickly if they are to find a deal, even if the kinds of properties they are interested in require substantial refurbishment. Unfortunately, traditional lenders, even if they are independent or a credit union, take several weeks before they can close on a loan, and those are weeks flippers simply do not have.

Flippers like to find tricky deals, although these are high risk, because they also have the potential for a huge payout. Flipping is not just about applying a new coat of paint and laying down some new flooring, which are things that anyone can do. True flippers purchase properties that are in a state of disrepair and require substantial modernization and renovation. They must also consider environmental problems, rewire the electrical system, put in new plumbing, and so on. These are the deals that flippers look for, because they are the deals that most people don’t want to take on. Naturally, the banks are reluctant to work with these properties, again increasing the need for a private lending alternative.

Hard Money Lenders Focus on Fix and Flip

The vast majority of hard money loans focus on fix and flip properties. However, others are used for sort term refinance, development, land acquisition, construction loans, and bridge loans. While this is not a huge portion of the overall hard money lending market, it is another piece of the overall financial pie. It looks like growth in the private lending market, therefore, will continue to grow, particularly in the suburban markets where there are many infill projects and revitalization projects.

So long as there are investors who are happy to diversify their portfolios and take risks because of the potential for a high return, private loans will continue to be available. So much so, in fact, that some are calling for private lending to become an official alternative to mortgages. Not just that, many financial advisors now consider it as an option to diversify the portfolio of their clients. Real estate has always been a solid investment, after all.

There is one caveat, however, and that is that many people now think that it is easy to fix and flip. There are many reality TV shows that make it look like the easiest and most fun job in the world. What these show fail to indicate, however, is that there are associated difficulties that can make a project turn sour. This has increased the risk for private lenders, who now have to spend slightly more time in determining whether a request for funds has been made by those who are experienced in this particular field and know what they are doing, rather than simply someone who has watched HGTV’s Fix or Flop series.

Hard Money Lenders Process

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Are you thinking about taking out a hard money loan? Before you do, researching more about getting one might help you decide if it’s for you. Read on to learn what it takes to get a loan from hard money lenders.

Who are Hard Money Lenders

Hard money lenders give out loans to people who need money for a new startup, flipping a property, or are trying to renovate their current home. These hard money loans can be the answer to all your financial struggles if you can’t get a traditional loan from a bank or credit union. However, like all loans, it comes with its own set of rules.

So, you might wonder: how can I find these hard money lenders? Well, it’s a lot easier than you think since they are all over the place. You can easily research some local hard money lenders to see which one is right for you.

Asking Hard Money Lenders for a Loan

After you find a few that look reputable and legitimate, put together a professional proposal that will have them saying yes. It’s easier to get a loan through this lender, but they will more than likely approve your loan when you present them with a laid-out plan. This plan should portray how you will repay the loan you owe them within the time they give you, which is likely 3 to 5 years.

Like most lenders, they will each have their interest rates and other particular rules for each borrower. You should go to more than one lender to see where you can get the best deal.

Asking Others for a Loan

Are you okay with asking family for money? It can be awkward, but you can borrow the funds from family, friends, or acquaintances for financial help. Even though family and friends aren’t hard money lenders, they are still another option for getting a fast and private loan.

Your family or friends trust you so that you will get a loan from them faster than other lenders. You can also figure out the loan requirements, such as how long before you need to repay them.

This option might sound great, but it can become a little messier if you drag out repaying them. It could affect your relationship if you don’t pay them back on time, so try to stay on track.

What It Takes to Get Approval

Most people know that it’s hard and takes a long time to get a traditional loan approved by a bank or other lender. However, it’s faster and easier to get approval by a hard money lender. If you are tight on time and need financial help with a project right away, this might be your answer. As reported by Harvard.edu, a traditional loan can take up to 30 to 45 days, while a hard money loan can take a few weeks. Therefore, a hard money loan can get your project going more quickly than a traditional loan can.

Traditional lenders often deny those who have a low credit score. However, that’s not the case with hard money lenders and their stipulations for approval. According to Harvard.edu, “An individual with bad credit can find a hard money loan in the event the job indicates a probable gain.” So, your credit score not matter to them as it does to other lenders since you have to pay them back sooner. This also means you are left with high-interest rates and points could be added to your total amount owed to them.

However, you need some collateral, such as your house or another property for them to approve your loan. They need that collateral in case you aren’t able to pay them back within the time frame you agreed on. Therefore, this is another reason your proposal needs to be perfect. Knowing how you will repay them will be crucial to keeping your collateral in your hands. Otherwise, you might lose it if you don’t commit to your business or remodeling plan.

Conclusion

Is a hard money loan for you? You should research and go over all your options before you settle on this loan. It might seem like your only solution, but going over all the pros and cons of seeking hard money lenders is essential. You could risk losing your collateral and owing them much more than you originally planned. Getting further into debt won’t solve anything, so make sure your proposal is perfect enough. Stay committed and focused on your business goals so you can repay them on time. You can do this if you put the effort and work into it!

Sources: https://exed.canvas.harvard.edu/eportfolios/931/Home/Understanding_Private_Mortgage_and_its_Advantages

 

 

Private Hard Money Lenders Are Seeking Funding Opportunities

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You need to know who to go to find money for your business. You believe in your business but now you need to find an interested money lender who believes in it too.  You know a bridge-loan or a hard money lender is the perfect solution for the influx of capital you need.

This article will provide you with information on the hard money lender criteria and process. If you want to know how lending and investors work, the below article will let you know. When you have questions about being an entrepreneur in this competitive business world, or just need a bridge loan for your business needs connect with us anytime.

Differences Between Private Lenders and Hard Money Lenders

Private money lenders are private investors. They can be difficult to find as most of them don’t advertise. Most of the time you find private money lenders through a professional network or peer. Private money lenders offer you more power to negotiate your loan terms for the deal. But attorneys are often involved unless you know your way around term sheets and contract obligations.

A hard money lender is defined as a short-term bridge loan funder. A good deal of hard money lending is used in real estate transactions, you may just not realize it. In hard money or bridge-loans there is higher risk for lenders so sometimes the loans have higher interest rates or payoffs. But these lenders also provide you with faster access to the capital you need. What’s more, they have a less stringent application process with flexible repayment schedules.

Right now is a great time to go after business funding. The economy continues to be healthy so there are more funding vehicles being created daily.  We are going to go over some secrets to finding interested funders who want to learn more about your business or funding needs.

The world used to be divided into private funders, hard money lenders, bank loan lenders, and loan sharks. All these groups had funding, and all were usually interested in speaking to you. Each group had its own reasons for wanting to lend you money. They also had their own respective criteria on what risks they would take.

There is no steadfast investment formula followed anymore by those who have money to fund projects, businesses, and dreams. If you are bold enough to have the vision with a concrete plan behind it, you may find a funder willing to listen.

Secrets to Finding Interested Money

There are bridge loan and hard money lenders interested in speaking to you today.  The truth is that bridge loan notes are used all the time by businesses. Many times, businesses today use hard money loans as their first infusion of dollars raised. Funders are doing it that way because it’s easier to negotiate the terms of a bridge loan than determine the value of a startup.

For a business or entity to run out of cash and need an influx of capital is not uncommon. “Founders have too much confidence in their business model, too little ability to forecast their burn rate, and too little willingness to give up equity.” Deepak Malhotra, Harvard Business Review. The businesses end result maybe it fails altogether.

Hard money lenders trust the relationship and put a premium on trust. If you want to find a funder interested in you and your product or service than a hard money lender is the place to go. But just like angel investments or bank loans there is a process and once you’ve settled on the terms of the loan, it’s important to sometimes remember you are creating a long-term partnership.  Honor the loan and the lender, and the lender will respect you back.

You never burn any financial bridge when you are in business for yourself. You never know when you may need funding or an influx of capital again. In the end, it doesn’t matter where you are getting your funding from, if the terms of the loan work for you. It is never too late to own your dream and find the interested money funder you need to make your dream a reality.  Reach out to us today, and we will help you find what road leads you to your future.

[1]  https://hbr.org/2013/05/how-to-negotiate-with-vcs

Laying Out The Myths And Facts Of Hard Money Loans

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The hard money or private loan can, under the right circumstances, provide borrowers with an easy to obtain loan. Unsurprisingly, it is getting increasingly popular, with the lending environment in banks remaining very unfriendly to borrowers. Indeed, there are numerous reasons as to why these loans are now so common.

Recent years have seen major growth in the private capital market with more lenders offering hard money loans and more borrowers seeking them out as alternative financing. While there are many reasons for the growth in this segment of the real estate market, here are four main ones: Mutually beneficial to borrower and lender. Credit availability. Asset-based underwriting. Higher returns on investments.

Yet, despite the fact that there are so many clear benefits, people are still skeptical about these types of loans. One of the reasons for that is perhaps because these loans can be quite a bit riskier because they don’t have a standard application and acceptance process. They also have much higher rates of interest. Nevertheless, everything has its pros and cons and it is all about weighing these up. Let’s review some of the most common myths about hard money loans.

Myth 1 – A Private Loan Is an Expensive Loan

The fact is that these loans indeed have a higher price tag, but a loan is taken out for a purpose, which means that what really matters is the return on investment. When you consider that a traditional bank will only finance up to 65% of the total cost of the project, it means a borrower must still be able to raise at least 35%. This is known as the loan-to-cost (LTC) ratio.

The loan-to-cost (LTC) ratio is a metric used in commercial real estate construction used to compare the financing of a project as offered by a loan to the cost of building the project. The LTC ratio allows commercial real estate lenders to determine the risk of offering a construction loan.

With a hard money loan, borrowers could raise as much as 90% of the total cost of the project. This means that they have more disposable capital to work with. And although the interest rate is higher for a private loan, many have found that the return on investment is also higher.

Myth 2 – Hard Money Borrowers Lose a Lot of Control of the Property

It is quite common for those who decide to go the traditional lending route to have to bring in a partner in order to be able to finance their project, leading to them having to give up at least partial ownership of the property. Some, in fact, will require full ownership to be given up. With a hard money loan, the lender owns part of the project, not the actual property.

Myth 3 – It Is Much Easier to Deal with a Bank

This myth stems from the fact that banks have a standardized process. While this may be true, this also makes them highly rigid. Banks also generally do not provide any finance for development or construction loans at all.

The implementation of HVCRE (High Velocity Commercial Real Estate) rules that went into effect for the banks at the beginning of 2016 has made a large impact in the space. This causes acquisition, development and construction loans to be reported separately from other CRE loans and to be assigned higher risk weighting by the banks.

Banks have to stick to the HVCRE regulations and they are only allowed to provide loans according to the rules of the Federal Deposit Insurance Corp. Additionally, they underwrite based on the borrower’s income. Finally, they are concerned about exposure and will therefore often only work with borrowers they already know.

A hard money loan does not have to deal with this, which is one of the reasons why even residential borrowers are now considering these types of loans. They have a quick, streamlined process and generally complete the transaction within 30 days. In fact, underwriting often only takes 48 hours. Private loans are also far more flexible as their terms and conditions can be modified or altered as a project progresses.

Refinance

How to Refinance a Hard Money Loan

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A hard money loan offers borrowers an opportunity to get quick financing without having to deal with the red tape associated with traditional bank loans. They’re often used by people facing foreclosure or looking for capital in order to flip a piece of real estate. These loans have high interest rates and shorter repayment periods, which means they need to be paid back quickly. However, if this is a problem, you can refinance a hard money loan.

For many people, this is a great time to buy a house. According to the U.S. Department of Housing and Urban Development, mortgage rates have fallen since November of 2018, reaching an average weekly low of 3.75% in June.

Unfortunately, those with bad credit still aren’t able to secure a loan from a bank. However, with a hard money loan, a private lender uses the value of the property as collateral instead of looking at your credit score. But what happens when the unexpected occurs and you can’t pay back the lender on time? It turns out there are ways to refinance a hard money loan. Let’s go over a few.

Consider a Fixed Mortgage

If you secured a hard money loan to purchase your home or avoid foreclosure, you may now be able to get approved for a fixed mortgage loan. Sure, you weren’t able to get approved for a traditional mortgage loan in the first place, but things could be different now. The initial hard money loan may have allowed you to improve your credit score.

Securing a fixed mortgage loan will allow you to pay off the private lender you got the hard money loan from. This may seem counterproductive. However, a fixed mortgage will carry a much longer repayment period and allow you to lock into a low interest rate.

This approach allows for a lot more breathing room than a hard money loan does. You have more time to focus on paying off the loan. Plus, your monthly budget won’t be eaten up by high interest rates.

Refinance with a Home Equity Loan

If you got a hard money loan to make renovations to your home, you may be able to use a home equity loan to pay it off. It’s important to remember that you’ll need to have acquired healthy equity and also a good credit score. If you don’t have this, you won’t get the loan.

Some homeowners seek out hard money loans when they can’t get a home equity loan due to bad credit. The hard money loan allows them the financial security to rebuild their credit score. If you’re in this position and want to refinance a hard money loan, consider applying for a home equity loan again. You healthier credit will make it easier to get approved.

Look for a Subprime Lender

Another option is to find a subprime lender to secure financing to pay off your hard money loan. Many subprime lenders work with banks and provide options for those who don’t qualify for a traditional loan.

What makes these lenders unique is they’ll do business with individuals with bad credit and lots of debt. The subprime loans they offer carry different terms. There’s a good chance you’ll have an interest-only or adjustable-rate mortgage.

On the surface, these loans may seem unattractive. However, they allow you the ability to refinance a hard money loan and enjoy a long repayment period.

A Cash Loan

If your hard money loan has a relatively low balance, getting a cash loan will allow you to pay it off quickly. This approach should only be used as a last resort, as most cash loans have very high interest rates. Many of these loans also come with fees. However, as Warren Buffet said, “Cash combined with courage in a crisis is priceless.” It may be time to bite the bullet.

Only consider this option if you’re at risk of losing your property by not adhering to the terms of the hard money lender. Yes, you’ll have to deal with paying back the cash loan, but you won’t lose your home. Look for a lender who’ll provide a little flexibility regarding the terms of your cash loan. If you find the right lender, you may be able to pay it off without much hassle.

Resources:

https://www.huduser.gov/portal/sites/default/files/pdf/Housing-Market-Indicators-Report-July-2019.pdf

https://www.investopedia.com/terms/s/subprimeloan.asp

Hard Money Financing Addresses Your Loan Dilemna

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Are you trying to get a loan to flip houses? Or need some quick money to finance your new startup business? Some people aren’t able to get a loan for their new business no matter how excellent their business proposal is. Well, you might apply for a hard money loan. Learn more about how hard money loan financing can solve making your business idea come to life.

Why Choose Hard Money Loans

Those trying to start a flipping house business or need funds for a new startup might consider hard money loans. You don’t have to stop your efforts to provide financing for your business since you have this other option.

It’s easier to be granted a hard money loan than to get accepted by a bank or other traditional loan. As reported by the Senate Committee on Banking and Financial Institutions, “Hard money lenders typically lend to borrowers unable to obtain credit elsewhere, or to borrowers who need money more quickly than traditional lenders can fund a loan.”

Most traditional money lenders take too long approving your application. You might not want to waste a whole month waiting when you can start almost right away.

However, hard money loans are a lot quicker to get accepted. People usually have a higher success rate with this loan. Having a great business plan will go a long way in getting accepted faster.

Who Gives Out Hard Money Loans

Some people have to resort to other options to finance their new business like an individual or group of investors who lend out hard money loans. These loans might be your only option if you have an eye on an expensive property or a risky one. Having too much construction to work on or some other obstacle might make traditional lenders hesitate. These hard money investors are used to putting their money on the line on high-risk business situations.

Not all investors will seek those high-risk investments. What will really help get your application accepted faster is if you draw up the perfect business proposal. Organizing the best business idea that shows the least amount of risk for your investors will get you accepted more than a sloppy one. It needs to portray how you will make a quick profit, especially if you want to repay your loan on time.

You can compare different financing companies to get the best deal for you and your business. The lender and loan term can also play a factor in how much they will allow you to borrow. You should make sure you borrow enough money for construction and all the other expenses you haven’t thought of yet. This is where extensive research can help you figure out how much to ask for.

Does Your Credit Score Affect Your Approval?

You don’t need a good credit score to be approved for a hard money loan. As stated by Senate Committee on Banking and Financial Institutions, you don’t need a high score to get hard money loans. Therefore, this loan can be perfect for those who have an excellent business idea but don’t have the credit history to back it up.

Drawbacks of Hard Money Loans

What’s the catch? There are some drawbacks to getting a hard money loan. First, offering your property as collateral, whether it’s your house or another property you own. Something has to be at stake for them to accept your offer.

According to Senate Committee on Banking and Financial Institutions, hard money loans usually have higher interest rates and points added to your final loan. You also don’t have the luxury of a long loan length. You have to repay the lender within a smaller time frame than traditional loans.

It all depends on the particular deal you made with your money lender. So, be absolutely sure your new business venture is successful and will make the profits to pay your loan back.

Don’t Let Financing Stop You

Don’t let your business proposal gather dust when you keep getting denied. Instead, seek hard money lenders to help finance the business you’ve always wanted.  Go over the benefits and drawbacks of hard money loans and see if it works for you. Take action now by researching the best hard money lender today and applying for a loan that will change your life!

Sources: https://sbnk.senate.ca.gov/sites/sbnk.senate.ca.gov/files/final%20backgrounder.pdf

hard money overview

Hard Money Commercial Loan Overview

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There’s no denying real estate investment is an extremely profitable business in America right now. A quick look at housing development trends will back this up. According to the Department of Housing and Urban Development (HUD), 854,000 single-family housing units were started in the first quarter of 2019. This means many investors will be seeking a hard money commercial loan to get their projects off the ground.

Traditionally, commercial and residential real estate investors would get the capital they need by applying for a bank loan. Unfortunately, this comes with a number of limitations. If an investor’s credit history is unhealthy, there’s a good chance they’ll be denied the loan altogether.

In recent years, however, hard money commercial leaders have become an invaluable resource for large-scale commercial and residential investors. Let’s break down the basics of a hard money commercial loan to determine if it’s right for you.

Understanding a Hard Money Commercial Loan

It’s important to understand the distinction between a hard money loan and a traditional bank loan. This knowledge is key if you’re in the commercial real estate industry and need to make a quick decision to secure capital. Getting the wrong type of loan could result in a financial loss once repayment begins.

An important distinction between a hard money loan and a bank loan is the type of lender. Because hard money loans are provided by private lenders instead of financial institutions, the entire process is different. These differences can be a huge benefit for many investors.

When applying for a commercial hard money loan, the lender looks at the value of the property instead of your credit history. Let’s say you apply for a hard money loan so you can start a commercial development project. The lender will look at the scope of the project and the value of the completed property. This is done by calculating things like gross scheduled income, and net operating income. They’ll use the property as collateral against the loan. If you default, the lender can take the commercial building as repayment.

Why Investors Should Consider Hard Money Loans

It’s important to note that a commercial hard money loan doesn’t come without risks. You must ensure you can pay back the money or you could potentially lose your property. However, if the conditions are right, a hard money loan will prove advantageous.

Real estate investors must make quick decisions. The famous real estate entrepreneur Jeff Greene made a great point when he said, “In real estate, you make 10% of your money because you’re a genius and 90% because you catch a great wave.” When a great wave comes, you need to ride it.

A major benefit of a hard money commercial loan is you can get approved quickly. Because the lender doesn’t have to look into your financial history, the process is much faster.

Another advantage is that private lenders tend to be much more flexible than banks. You can negotiate repayment terms and interest rates. You can also work out deals where the lender recoups personal assets first if repayment terms aren’t met.

Things to Watch Out For

There are also a number of disadvantages attached to hard money commercial loans. You must analyze your financial situation, the scope of your project, and projected earnings before applying for one.

One of the biggest disadvantages of a hard money commercial loan is the interest rates. They tend to be much higher than traditional bank loans. This means you need to be certain you can pay it back fast. If you plan on making a big profit off your investment right away, this shouldn’t be a problem.

Another potential disadvantage is the shorter repayment period most hard money loans carry. Keep in mind that these loans are meant to allow investors to buy property or start development projects right away. These aren’t long-term mortgage loans. That being said, if you don’t feel like you can adhere to the repayment period, stay away from a hard money loan.

Is a Hard Money Loan Right for You?

When considering a hard commercial loan, a good rule of thumb is to determine when your property will become profitable. You need to have a solid business plan in place and know exactly how much time it will take to complete your project. If all these details are in order and you simply need the funding to get started, a hard money loan may be the perfect move.

Resources:  https://www.huduser.gov/portal/sites/default/files/pdf/NationalSummary_1Q19.pdf

https://www.wikihow.com/Evaluate-Commercial-Property