The Real Deal With Hard Money Lenders

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A lot of people who want to move into the property investment market will soon find that they would like to know about hard money lenders. They don’t really know who they are, where to find them, whether the conditions of their loans are suitable, and so on. If this you, it’s important to learn to understand all you can before making important financial decisions.

What Is Hard Money?

The first thing to understand is the concept of hard money.

Hard money lenders (HMLs) are typically private individuals or small groups that lend money (Hard money) based on the property you are buying, and not on your credit score.

Soft money is often hard to be accepted for, but it has flexible terms and it is very affordable. Hard money, on the other hand, is easy to obtain but it comes with restrictive rules and is more expensive because it has higher interest rates. Furthermore, soft money usually comes from financial institutions, whereas hard money comes from private investors. This is also why the hard money loan is more expensive and restrictive because people are investing their own capital.

Hard Money Lending Terms and Conditions

Because hard money lenders are often private individuals, they can set their own terms and conditions for the loan. In the past, it was based solely on the fair market value of the property, but many now also want additional equity. Hence, while they have different acceptance criteria when compared to banks, they do have very strict criteria as well.

It’s therefore common for private lenders such as hard money lenders to issue loans based on LTV for a property in good condition and loans based on ARV for a property in poor condition. Purchase hard money loans are based on LTV while rehab loans are based on ARV.

The ARV is the After Repair Value and hard money lenders usually loan no more than 70% of that. What this means is that, in some cases, you may be able to borrow more than the purchase price of the property as well as additional money to repair it, because the ARV is so much higher than the purchase price.

In return for this, however, you can expect to pay a higher interest rate. Usually, the interest rate is between 12% and 20% per year and you can take out these loans for a duration of six months to five years. The interest rate will usually depend on your experience as a home investor and on your credit score. Additionally, you will have to pay a number of fees and closing costs, generally from two to 10 points, in order to be able to access this type of money.

The Pros and Cons of Hard Money Lenders

One of the key benefits of a hard money loan is that the decision-making process is incredibly quick. When an investment opportunity arises, it is vital that you move fast, or someone else will snap it up. This is why you have to build relationships with hard money lenders so that you never miss out.

A big disadvantage, however, is that most hard money loans come with a pre-payment penalty.

If the borrower decides to prepay the loan, the lender will issue a prepayment quote based on this principal sum. The sum may be as large as the entire initial loan. Despite years of payments toward the debt, the borrower has paid off only the interest and failed to actually gain equity in the property.

Applying for a Hard Money Loan

When you apply for your first hard money loan, you will usually have to supply quite a bit of information. This includes your income tax returns, your W-2s, your pay stubs, bank statements, and more. This is because lenders want to make sure that their assets are properly protected. That being said, there are still hard money lenders out there who care little about your financial background and are interested solely in the ARV of the property you want to invest in.

Is a Hard Money Loan Right for You?

A key question to ask is whether or not a hard money loan is right for you. If you are a new investor and you don’t have a lot of money behind you yet, or if you have a poor credit rating, you may not qualify for traditional loans. If you need money in a hurry, then private loans are also much more appropriate. Even if you have a good credit score and a high down payment, it will still take at least 30 days for a bank to accept your application, in which time the deal could have gone to someone else.

Hard money is incredibly creative. While you are technically restricted by how much you can borrow and how that relates to the value of the property, the fact that lenders are happy to consider the ARV of the property means that you can often borrow without having to put anything down.

Finding Hard Money Lenders

Last but not least, you need to know where to find these lenders. They can be found in various states across the country. Indeed, it could be that someone in your immediate social circle is a hard money lender. Real estate agencies and title companies can often refer to you as well. Make sure that you compare the different options that are out there until you find a lender that meets your needs. Because a hard money loan is a very serious financial commitment, you should make sure that you get the best deal available. Hence, make sure to consider interest rates and prepayment penalties.

The above provides an overview of what a hard money loan is and how it works. This should empower you to make educated decisions in terms of whether or not the solution is right for you. Once you have worked with a hard money lender and you have both been happy with the transactions, then you may have a lending partner for life, meaning you can move on to other investments over time.

Choosing a Commercial Hard Money Lender

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Being able to gain access to large amounts of money quickly is essential in the real estate market. There are often numerous buyers trying to get the same property if it is priced well. With more than 600,000 houses selling in May of 2019 alone, the market is very competitive and can be quite lucrative. This means you need to be able to get the money to buy properties quickly and this is where a hard money lender can come into play.

Traditional bank loans can take weeks or even months for approval and have stipulations that can be difficult to meet. Many real estate investors turn to a hard money lender as a way to get the money they need quickly. Hard money loans are sometimes easier to get than traditional bank loans because they don’t have as many stipulations. You don’t need a high credit score, a large down payment and can often get the money in a very short period of time.

When it’s time to get a hard money loan, you need to be sure you use the right hard money lender. With so many lenders on the market, it can be difficult to know which one to use though. The following guide walks you through a few tips you can use to ensure you work with the best hard money lender possible.

Word of Mouth Can Be Your Best Friend

The first thing you need to realize is that other real estate investors in the area can be an asset to you. You don’t want to look at them as strictly competition because there is a good chance that they can provide you with valuable information. Talk to other investors about the hard money lenders they have used. Find out why they recommend them and which lenders they suggest you avoid. Talking to a few different investors allows you to compare the information to ensure that people are giving you valuable advice.

Do Your Own Research About the Hard Money Lender

While it can seem like you need to rush to get a loan when a house comes on the market, doing research ahead of time can be really helpful. If you know that you want to invest in properties in the near future, do research on the hard money lenders that other investors suggested before you actually need to buy a property.

Look for information about the company with the Better Business Bureau. Unsatisfied borrowers can file complaints with the bureau that you can read. According to the Better Business Bureau, trusted lenders never ask you to pay fees upfront for a loan. “A real lender will post those fees prominently and collect them from the money they are lending you, but a scam lender may try to collect them as a condition for you getting money. ”  If you see that the lender has numerous complaints against them, they may not be the right hard money lender for you.

Find Lenders Who Charge Reasonable Fees

There are fees associated with any loan, you get. This is the way that the hard money lender is able to make a profit off of the loan to make it worth their while in the end. It’s important to know that there is no flat fee that all lenders charge for their loan. You need to compare the fees of a few lenders before choosing which one you will use for your lending needs. This allows you to be sure that you don’t overpay for the loan when things are said and done.

Ensure Commercial Hard Money Lenders are Licensed

A real estate broker license is required in order for lenders to be able to legally lend money to real estate investors. Ask for the license ID number for any hard money lender you think you may want to work with and run the numbers through the real estate bureau within your state. You want to be sure that they really are licensed and that they have been in business for an extended period of time.

Meeting with hard money lenders can be a bit intimidating at first. Ensure that you work with a lender who makes you feel comfortable, not pressured to sign paperwork for a loan right away. Reputable lenders will want you to take time to consider your options to ensure you make an informed decision regarding their hard money loans. Be sure that you read the details of any agreement closely so that you understand when payments are due, what the interest rates are and how long you have to pay back the loan. Hard money loans typically need to be paid back in a short period of time in comparison to traditional loans so make sure you understand the logistics of the agreement is essential.

References:

https://www.bbb.org/article/news-releases/16919-bbb-tip-advance-fee-loan-scams

https://www.census.gov/construction/nrs/pdf/newressales.pdf

 

What is a Hard Money Loan?

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The phrase hard money loan has a negative connotation for many people. Maybe that’s because it sounds too good to be true.

Hard money’s bad reputation is also due to predatory lenders who preyed on homeowners years ago in an attempt to recoup their properties when loans weren’t repaid. They offered very risky, even shady, loans and many people took the bait.

Fortunately, these lenders are no longer able to operate today. The truth of the matter is that this type of loan has and will continue to provide opportunities to homeowners and investors.

If you’ve heard of hard money loans, but aren’t exactly sure what they involve, keep reading. We’re going over what they are and how they can be beneficial.

The Basics of a Hard Money Loan

Also called bridge loans, hard money loans are meant to provide quick cash to real estate investors or homeowners. They’re typically issued by private lenders instead of large banks.

These are short-term loans that don’t require the borrower to have great credit. In fact, lenders typically don’t even pay attention to an applicant’s financial history. Instead, they use the value of the property as collateral against the loan.

Because a person’s credit score isn’t considered, hard money loans can be approved and issued very quickly. However, borrowers have much less time to pay back the loan. If they default, the lender can seize the property to recoup the money.

It’s important to understand that a hard money loan isn’t for everyone. However, if used correctly, they can be a great resource for people wanting to secure their financial situation or those needing capital to get a project off the ground.

Advantages Borrowers Enjoy

To quote Benjamin Franklin, “If you would know the value of money, go and try to borrow some; for he that goes a borrowing goes a sorrowing.” This seems like good advice, but it definitely doesn’t apply to many hard money borrowers.

Because a hard money loan is structured differently than a traditional bank loan, it carries several advantages. These benefits give borrowers much more freedom.

A primary benefit is the convenience surrounding the application and approval process. Because lenders aren’t looking at an applicant’s credit score, the loan can go through very quickly. With a traditional bank loan, it could take months.

Another huge benefit is flexibility concerning repayment terms. Remember, these are private investors, which means you have more wiggle room to negotiate.

Finally, many lenders will sometimes allow borrowers to use other personal assets as collateral instead of the property. This is great if your home is in disrepair and you need money to fix it up.

Interest Rates

The primary downside of hard money loans is interest rates. They’re typically higher than those attached to a traditional bank loan.

This is due to the fact that lenders must take on more risk. As a way of protecting themselves, they need to increase rates. They’re usually between 10% and 15%. This will change based on the lender and the value of the property in question.

It’s important to keep in mind that hard money loan interest rates will vary based on where you live. States with a large number of hard money lenders will have lower interest rates due to tougher competition.

Situations Where Hard Money Lending Can Help

Home prices have been trending up. According to the U.S. Census Bureau, the median price of a new house sold in May 2019 was $308,000. This means people will need more money to cover down payments.

Home flippers who buy homes, refurbish them, and then sell them for a profit must have quick capital when a home they want comes on the market. It simply doesn’t make sense for them to jump through the hoops required to get a traditional bank loan. Instead, they can use hard money loans to make quick purchases, sell the home, and repay the loan.

Hard money loans are also perfect for real estate investors looking to start a construction project. They can’t put the project on hold while they wait for a bank to complete the approval process. Working with a hard money lender means they get the capital they need right away.

Finally, these loans are helpful for individuals who want to own their own home but have bad credit. As long as they follow the repayment terms, they can enjoy living in a house they love without dealing with a bank.

Resources:

https://www.census.gov/construction/nrs/pdf/newressales.pdf

 

Hard Money Mortgage Lenders Can Help Stop A Foreclosure

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Foreclosure is a homeowner’s worst nightmare, especially if their family’s well-being is at stake. Unfortunately, they happen more often than you think. According to data collected by the Federal Deposit Insurance Corporation, 250,000 new families enter into foreclosure every three months. The good news is, hard money mortgage lenders can provide options to people facing the loss of their home.

Unlike transitional mortgage loans given out by banks, hard money lenders are typically private investors. Instead of looking at a borrower’s credit score and financial history, they use the value of the property as collateral against the loan. This makes the approval process both easier and quicker.

In short, a hard money loan gives a homeowner the ability to pay off a mortgage and refinance or enter into a short sale, which are both better options than a foreclosure. To get a better idea whether this type of loan is right for you, let’s look at some situations that lead to foreclose and how hard money mortgage lenders can help.

Understanding Foreclosure

A foreclosure happens when a lender forces the sale of a home after the borrower fails to make monthly payments. The money acquired in the sale will go towards repaying the mortgage. This is a legal process that puts the borrower at a huge disadvantage

Most of the time, foreclosures result when a family experiences an unexpected setback. Job loss, medical bills, divorce, and overwhelming credit card debt are some of the most common reasons for homeowners to default on mortgage payments. Although lenders will often work with you if you’re having trouble, you won’t have much time to get current.

J.P. Morgan saw the positive side of foreclosure when he said, “Giving debt relief to people who really need it, that’s what foreclosure is.” Unfortunately, there are a number of consequences associated with having your home foreclosed on. Some of the most damaging include:

  • The loss of your home along with equity you’ve built up.
  • Damage to your credit score.
  • You may still owe a balance, even after the foreclosure goes through.
  • The inability to acquire a mortgage or qualify for property leasing in the future.

These repercussions make it obvious why preventing foreclosure is absolutely necessary. However, when you’re already facing so many financial problems, where do you turn? This is where working with hard money mortgage lenders can be a great benefit.

How a Hard Money Lender Can Help Stop a Foreclosure

Many people opt for taking out a second mortgage or getting a home equity line of credit when they run into trouble with their original mortgage. However, if you already have poor credit, this isn’t an option.

By applying for a hard money loan, you’ll get quick cash without having your credit and financial situation scrutinized. Hard money mortgage lenders look at the property value of your home along with the current market and use this as collateral. They don’t care about your credit score.

Now, one disadvantage of a hard money loan is you’ll only get a percentage of the total value of your home. However, if you use the money properly, you’ll come out on top. For instance, you could pay off the delinquent amount you owe on your existing mortgage and then some. Or, you could opt to use the hard money loan to pay off debt or renovate your home in preparation for a short sale.

In addition to not having to worry about your credit score, the approval process is very fast when working with hard money mortgage lenders. The traditional bank loan process is much more complex, which may not work if you need money right away.

Find Out if a Hard Money Loan is Right for You

It’s important to understand that hard money loans are meant for short-term solutions and typically carry higher interest rates than traditional loans. Think of them as recovery loans. However, when facing foreclosure, they can be extremely effective tools for opening up opportunities.

These types of loans have become very popular in recent years due to the freedom they provide homeowners facing foreclosure. Speak to a hard money mortgage lender and find out what type of interest rates and repayment terms they can offer. There’s a good chance you’ll get the peace of mind you need during trying times.

Resources:

https://www.fdic.gov/about/comein/files/foreclosure_statistics.pdf

 

 

Pros and Cons to a Hard Money Loan

Pros and Cons to a Hard Money Loan

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Personal finances are an important part of your past, present and future. After all, you need money not only to survive, but also to do the things you want to do in life. Sometimes, you may fall short of your savings goals or need to borrow money to make a big purchase. That's where hard money loans can come in.

What are Hard Money Loans?

First of all, it's important to understand what a hard money loan actually is. This is a specific kind of asset-based loan financing in which the funding is secured by real property. In other words, a hard money loan is a form of funding using real estate/property as collateral, rather than the creditworthiness of the borrower. If you have poor credit or struggle to get a loan from traditional lenders for what is deemed a risky property, a hard money loan could save the day. In a world where debt is so common – 58% of college graduates have student debt, according to the Kennedy School at Harvard's Institute of Politics – hard money loans can make a major difference.

These are short term loans with higher interest rates, issued by private individuals and companies that are willing to take on the risk. Many people use hard money loans in their real estate endeavors, with flipping houses being the top example. Property flippers who want to renovate and resell the property within a year or sooner may turn to hard money loans for help. Although the interest is higher, if the borrower intends to pay off the loan quickly, usually within one to three years, then it can be a worthwhile financial move.

Hard money loans are often easier to obtain than traditional forms of financing, and as long as you do your research beforehand and choose a qualified, suitable hard money lender, you should have a good experience. While flipping houses and turnaround situations is a primary reason why hard money loans exist, this funding can also assist borrowers with low credit scores but considerable equity in their property. Plus, hard money loans can be issued quickly, so they can be a good way to avoid foreclosure in the short-term.

Hard money lenders pay less attention to a person's credit score and concentrate more on their property assets. If you've been turned away from traditional funding sources such as a bank or mortgage broker, it may be time to explore the benefits of a hard money loan.

What are Pros of Hard Money Loans?

As with anything in life, there are both pros and cons to a hard money loan. Depending on your situation, you may find that the pros far outweigh the cons. Perhaps one of the biggest advantages to hard money loans is that they move quick. You don't need to wait for weeks and months on end to get approved for this kind of funding. Overall the U.S. has a mind-boggling $10 trillion in mortgage debt alone, as reported by the Federal Reserve, so it's crucial that you make the right choice when it comes to your type of loan. If you need money fast, and you don't mind paying higher interest for the short-term, then a hard money loan could be the solution you've been looking for.

Another pro associated with hard money loans is the relatively straightforward and simple approval process. If you have the right criteria, namely a property that can serve as collateral, you may be approved faster than anticipated. So long as you're working with a trusted hard money lender, you may get great financial news. Being approved for a hard money loan is a big moment, especially if you've want to get into property flipping or you've been refused traditional forms of lending.

It can be frustrated and disappointing to be rejected by banks and mortgage brokers time and time again. If you've been let down by potential lenders and you're feeling flat about your financial circumstances, a hard money loan could have a positive impact on your life. That's because these loans are an attractive alternative for those who could not get a traditional loan due to poor credit history or other circumstances. Hard money lenders tend to be more flexible, as they don't use a typical underwriting process when it comes to approving loans. Instead, these lenders evaluate every deal individually, meaning you may be able to discuss repayment schedules, interest rates and more. Rather than dealing with the big banks and large corporations, you may be working with an individual or small-business minded hard money lender who is more likely to meet your needs.

What are Cons of Hard Money Loans?

Of course, it's also important to consider any potential downsides to hard money loans, which will be dependent on your current financial situation. Generally speaking, the biggest disadvantage to hard money loans is that they can be more expensive in terms of interest. Because they are so fast and flexible, hard money lenders are able to tack on higher interest rates to accommodate the loan terms and conditions.

If you're planning on paying back your loan within a few years, the increased interest rate won't be too much of a factor for you. This is particularly relevant for property flippers who know they will be reselling the property for a profit in a short amount of time. For homebuyers who are planning on living in their house for years to come, higher interest rates may pose a concern. That's certainly something to consider when planning for the future and deciding on which type of funding is best for you and your loved ones.

Just like any other funding option, hard money loans aren't perfect. You must keep in mind that lenders may use more conservative methods to evaluate your property than you'd expect. Combined with the expensive fees, hard money loans need to be carefully thought about before signing on the dotted line. If it seems feasible for you, and you've met with a reputable hard money lender and read through everything, then you should know what to expect and hopefully have success with your loan in the future.

If you're interested in learning more about hard money loans and figuring out if they would work for you, then it's time to contact your local hard money lender today. They'll be able to help you further understand this funding and make the right financial move for you.

Sources: https://iop.harvard.edu/student-debt-viewed-major-problem-financial-considerations-important-factor-most-millennials-when

https://www.federalreserve.gov/data/mortoutstand/current.htm

https://hardmoneylendersonline.com/hard-money-loans

Why Hard Money Is A Great Option For Investment Property Loans

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Home flipping has become increasingly popular again over the past few years. Real estate investors shunned it as a result of the Great Recession, but they are now once again cautiously optimistic. In fact, according to a report by Attom Data Solutions, 2017 was an 11 year high.

ATTOM Data Solutions, curator of the nation’s premier property database, today released its Q4 and Year-End 2017 U.S. Home Flipping Report, which shows that 207,088 U.S. single family homes and condos were flipped in 2017, up 1 percent from the 204,167 home flips in 2016 to the highest level since 2006 — an 11-year high.

There Is Money to Be Made in Home Flipping

The total amount spent on flipping was $16.1 billion in that year. All real estate investors know that it can be very difficult to get a loan for an investment property and that it is vital that the loan is right. In fact, this can be the difference between failure and success. This is for anyone who wants to get involve in flipping properties or investing in these properties and become a landlord.

Many of us like the idea of making extra money. Who doesn’t want a little more cash in their pocket each month? Becoming a landlord is a nice way to earn some passive income, but not everyone can afford to buy a new place or purchase an apartment building.

There are numerous options available to you if you want to get a loan for an investment property. Traditional banks continue to be not cautious, however, which means you will have to do a little bit of research into other potential financing options. They include home improvement loans, home equity lines of credit (HELOC), cash out refinance options, partnerships, seller financing, FHA loans, personal loans, and hard money loans.

All About Hard Money Loans for Investment Properties

When people want to get a mortgage for an investment property, they often consider the traditional lenders, i.e. banks, first. However, since banks continue to decline applications for these types of properties, investors must become a little bit more creative. House Heroes is a Florida based house flipping startup business who is looking into hard money loans instead.

We’ve been buying property in Florida for over 5 years. We help homeowners sell in all sorts of situations: sell fast, major renovations, inherited house, relocation, foreclosure, eviction, late taxes.

Hard money loans are incredibly popular with home flippers. It means that money is borrowed from a business or individual and this money is used to fund a real estate investment. While a non-traditional type of loan, it is often possible to borrow more than the sale value of the property. This means that money remains available to upgrade the property, which in turn means an investor can sell it rapidly. Of course, this is a gamble as it is necessary for the property to then sell for more once it has been upgraded, eventually leaving the flipper with a profit. Ideally, the profit is then used to fund part of the next property, and so on.

However, it is common for hard money lenders to want to see an investor have some money to their name as well, usually at least 20% of what they hope to borrow. Additionally, in return for a quick and easy application process and a willingness to take risks, borrowers do have to pay a much higher interest for the loan. This is understandable, since a hard money loan is private money and people would only agree to put some of their money at risk if the gain is large enough. Additionally, provisions are in place that enable hard money lenders to rapidly repossess a property if payments aren’t made.

Hard Money Direct Increases Your Financial Power

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Obtaining money for an upcoming project can be hard if you choose the traditional route which utilizes a bank or credit union. It can mean a lot of time spent sitting in an office, signing too many papers, and playing a waiting game that you may lose. An exciting discovery for businesses and individuals looking for a loan is there is another way.

Hard money loans are unique in that they allow individuals and businesses to receive a loan when they would have been rejected by a traditional lender. This type of loan does have cautionary characteristics but still stands strong as a way of increasing your financial power. According to the chief economist of Lending Tree, “If you’re not able to access a traditional loan, then maybe there’s an opportunity here.” For the estimated 68 million people who have bad or low credit scores, according to Vantage Score, this opportunity could not come at a better time.

Let’s take a deeper look into three ways to increase your financial power with a hard money loan.

Streamline the Process

No one likes to spend their free time in an office waiting for answers. Traditional lenders, such as banks and credit unions, are basically playing the middleman of the loan process. In essence, you must talk to a loan officer who then talks to the bank. This “conversation” can take weeks. Underwriters must construct your loan portfolio and write out the terms. This all sounds complicated, right?

In order to gain financial power, take out the middleman. Take control of what you need and how you get it with a hard money loan. Because you will be doing business with the lender themselves, there are no waiting periods to deal with. No, let me call the corporate office. No time spent waiting on underwriters.

Paperwork is another area which can get cumbersome. Hard money lenders will have this down to a science. There are fewer restrictions, therefore, requiring less documentation. In layman’s terms, hard money lenders are more concerned about the collateral than the documents. A fine-toothed comb is not needed in this process.

Flexibility with Hard Money Loans

Everyone needs flexibility in their lives. Why should this be any different in your finances? Hard money loans offer flexibility in which the receiver of the funds can determine how long they need to repay the loan. Because you are dealing with the lender themselves, there is some leniency with the terms. Most lenders allow for repayment times which range from 12 months to five years.

The ability to have a voice in your financial present and future is vital. It gives you the power to negotiate the terms. There are no requirements on terms, leaving you freedom and flexibility.

Financial Leverage

As we have already established, a hard money loan is a way to obtain money quickly for individuals and businesses. This is especially true for real estate entrepreneurs. For example, flipping houses have become big business in the past decade. To flip a house, one must be bought quickly, remodeled, and then sold. Since fabulous deals don’t hang around long, buyers need to snatch them up quickly. With a hard money loan, flippers have a way to get the money they need quickly and on a short- term basis. Long term this could mean more profit in their wallets and better chances of continued success.

Bottom Line…

We all need help from time to time. Sometimes we need help paying the bills or making our dreams come true. When times like these arise, it should not be hard to get help. It should not be difficult to find a way to stand on our own two feet.

Hard money loans are a unique way to get the help we sometimes need. They allow individuals and entrepreneurs to streamline the process, have flexibility, and use leverage. Hard money just makes sense. If you have collateral or assets, then you can take advantage of these loans. They are definitely worth considering. In order to obtain a hard money loan, contact a lender and begin living your dreams.

References

Prittchard, Justin. The Balance. n.d. https://www.thebalance.com/hard-money-basics-315413.

Wiebe, Jamie. Magnify Money. n.d. https://www.magnifymoney.com/blog/mortgage/the-pros-and-cons-of-a-hard-money-loan/.

6 Key Awareness Points Before Borrowing Private Money

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A lot of people are interested in taking out hard money loans, particularly if they want to purchase a fix and flip property or a rehab property, which banks won’t usually lend against. Indeed, there has been a significant increase in interest in these types of loans, which are usually taken out for around a year. Using such kind of private money is a great way to build a real estate investment portfolio, but it is important to research whether or not it is an appropriate solution for you. Below are 6 key factors to consider.

1. Make Sure You Choose the Right Lender

You should never simply pick the first lender you come across. Instead, there are questions to ask and considerations to make.

When you want a loan on a short term basis without much documentation then this is the best option. Private money lending is famous for the convenience it avails to persons who require financial funding but may fail to meet the threshold of banking institutions. Bearing in mind the minimal formalities, it brings about risk in dealing with such transactions as you also don’t want a fraudulent money lender to take advantage of you.

Make sure that your lender has experience in the type of deal you are interested in. If you want to fix and flip an industrial property, for instance, find a lender that has successfully invested in that before.

2. Understand Your Financial Role in the Flip

A lot of people like the idea of fixing and flipping because they think they can make a lot of profit. This is also due to television programs that make it appear like such an activity is a lot of fun. However, to do so successfully, you need a lot of expertise and experience and you have to be able to handle the risks involved as well.

3. Try to Help Build Communities by Investing

When you take out a private money loan, you actually invest in a neighborhood and that is a significant responsibility. The money will be used to improve a local area, boost business income, create jobs, and more. When you invest like this, you will see tangible improvements unlike what you would see when buying stocks and bonds. Your lender, therefore, should have a vested interest in the community as well.

4. Don’t Worry If You’re Not Rich

When people think about real estate investors, they often think of property tycoons like Wang Jianlin.

Wang Jianlin, a 1954 born Chinese businessman and philanthropist, serves as the chairman of the Dalian Wanda Group, which is also China’s largest real estate company, as well as the world’s largest movie theater operator. He owns 20% of the Spanish football club Atletico Madrid.

In reality, however, real estate investing is open to anybody, even if you need to get a hard money loan to fund your deals. Of course, you should never put all your eggs in one basket, so you have to find a balance between how much of your own money you can put in, and how much of a private money loan you will need to get.

5. Remember That You Will Have Tangible Assets

Getting a private loan means that you will invest in a material asset. The hard asset is the collateral for the loan, and it is also from this that it gets its name: ‘hard’ money lending. Owning property is a serious commitment that you have to be ready for and you must also understand that tangible assets are often slower to turn into a profit. But when they do, the profits can be substantial.

6. Have Realistic Expectations

Last but not least, it is important to understand that you will not go from being a first time investor to being the President of the United States. Even Donald Trump had to go through several steps before achieving that. When you start at the bottom, the road to the top is long but satisfying.

Finding Hard Money Equity Lenders

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Most people aren’t aware that there are ways to bypass the bank when looking for a loan. If investing in fixer-upper properties is in your horizon or you find yourself in need of cash because life situations arise that are out of your control, finding a hard money equity lender may be beneficial to your needs.

What Does Hard Money Equity Mean?

Hard money loans are asset-based loans that are primarily used in real estate transactions. In simple terms, it is a private loan that doesn’t require mounds of paperwork. A borrower receives funds and the loan is secured by real property that is used as collateral. If the borrower defaults, the collateral becomes the lenders.

“These are private investors who, if the interest rate is high enough and the perceived risk is low enough, they will put the money up,” says Pam Strickland, owner of a mortgage consulting service.

It is called “hard money” because borrowers are charged a higher price in both interest rates and orientation fees.

A hard money loan is funded by private investors as opposed to conventional lenders such as banks or credit unions. The terms of hard money loans are usually short; typically, 6 months to 3 years.

Finding Hard Money Loans Tips:

  • Find a profitable property. A hard money equity lender will not loan on a property that is going to lose money.
  • Partner with someone who is experienced. If you are new to investing, consider partnering with an experienced hard money lender with a portfolio of properties. They can help you get the loan you need and show you how to make the property profitably.
  • Cash reserves are a plus. Hard money lenders prefer to work with experienced investors who have a record of being successful. Being a new investor won’t result in an automatic no, but your chances of getting approved will increase if you have substantial cash reserves and collateral.
  • Have an exit plan. Most hard money borrowers are flipping properties for profit. Show the lender what you are doing to the property in a very detailed plan and emphasize how much money it will make.
  • Keep working on your credit score. While many lenders loan to people with bad credit, you still should try to raise your score. Maintaining a decent credit score will help secure lower interest rates and approval rates for future loans.

Why Use Hard Money Lenders?

Why would someone want to borrow money with a high-interest rate? Hard money loans can be useful for individuals with poor credit, currently unemployed, or need fast cash. According to the Urban Institute, the mortgage denial rate in 2017 was 31% largely due to poor credit. Some of the known advantages to hard money equity are:

  • Hard money loans are fast. Hard money loans can be closed in days or in a few weeks. Getting a private money loan closed quickly is very important to borrows seeking to purchase investment properties. You could easily lose the home to another buyer if you don’t act quick.
  • Hard money is flexible. Lenders of hard money look at each loan deal individually; they do not use formal underwriting like a bank. Most of these lenders are small companies so there may be more room to negotiate the terms of the agreement.
  • Approval can be easier. The collateral you are borrowing on is the most important factor in a hard money loan, especially for borrows with bad credit. If you are purchasing an investment property, lenders will usually only loan out what the property is worth. Many hard money lenders don’t care if you have a foreclosure or bankruptcy on credit; their biggest concern is profitability.

Conclusion

Although the majority of hard money loans fund real estate fix and flip projects, in 2017, Forbes reports that more borrowers are seeking loans for bridge loans (money to cover the gap between two transactions), construction loans, development, land acquisition, and short-term refinancing. Regardless of how the loan is used, this strengthens hard money lending’s noteworthy market share as compared to traditional financing.

Resources

Forbes: How The Rise Of Private Lending Is Reshaping The Mortgage Market  https://www.forbes.com/sites/forbesrealestatecouncil/2017/12/05/how-the-rise-of-private-lending-is-reshaping-the-mortgage-market/#260f681452ae

Urban Institute   https://www.urban.org/sites/default/files/publication/98823/real_denial_rates_2.pdf

SF Gate Home Guides   https://homeguides.sfgate.com/hard-money-lenders-2627.html

 

 

How Does A Hard Money Loan Work And Who Is It For?

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A hard money loan is a unique financial construction. It is a short term loan and is offered as interest only. These loans are perfect for those wanting to purchase distressed rehab properties, for which it is impossible to get a traditional mortgage. The interest rate on a hard money loan tends to be a lot higher, with averages of around 12%. However, they can be completed in as little as 15 days and they usually run for no longer than a year, after which the property can be flipped.

Anyone interested in investing in properties very quickly, therefore, may want to consider this type of loan. While they are expensive, they are also quick and reasonably easy to obtain. This makes them interesting for those who would otherwise be declined.

When applying for a loan from a normal financial institution, you will be expected to meet many hard-set requirements. […] As long as you have a high-value asset with at least 20% equity stake in it, there are good chances that you will qualify for the loan.

How Do Private Loans Work?

Private loans are designed to help fund a real estate investment’s purchase and renovation. They are quick to obtain, particularly compared to a traditional mortgage, and they have very flexible acceptance criteria. Fix and flippers, who buy and sell properties within a year, are particularly interested in them.

In addition, they can also be beneficial for a long term investor who holds a property but then switches to a traditional mortgage after renovating a property. As such, the timeline of investment is not so important. Rather, it is about needing money to buy a property that is in disrepair and having the funds for the repairs. Typically, people only pay interest back on their hard money loan while it is running. Generally speaking, these loans also have no prepayment penalties.

While lenders want their money back also – interest is still important to them. When you prepay, you are cutting into the overall interest a lender can earn on financing your loan.

What this means is that, should you complete the work on the property sooner than expected, you can pay off the loan sooner as well. Typically, investors like these types of loans because they pay out so quickly and have minimal requirements. These benefits are so great, in fact, that they are happy to pay more for the loans. Interest rates usually range between 7% and 12%, and lender fees (points) are between 1% and 10%.

Should You Take out a Hard Money Loan?

If you are a short term investor, such as a fix and flipper who doesn’t intend to hold a property for more than 12 months, then you may want to consider a hard money loan. If you are a long term investor, then you should really only consider this type of loan if you know that you will be approved for a more traditional, long term, affordable loan after a reasonably short period of time. Typically, two kinds of investors will consider private lending.

First, there are the fix and flip investors.

Fix and flipping homes may seem like a pretty simple concept. Buy a house that needs some work, fix it up and sell the house. The truth is it takes a lot of time to find the right deal, find the right financing, find the right contractor, decide what to repair, maintain a property, value a property, make sure all the needed repairs are done and then sell the house. Fix and flipping is not something you can spend a couple of hours on a week and be successful.

The reason why fix and flippers look for a hard money loan is because it allows them to finance the purchase price of the property and the money required to pay for the work that needs to be done on the property. Hence, fix and flippers try to find homes in a very poor condition, fix it rapidly, and sell it for, sometimes, huge profit. They find these properties through lender owned REO listings, foreclosure auctions, and short sales.

Usually, investors are able to receive a private loan based on the ARV (after repair value) of the property. They receive the funds, buy the property, and fix it using their hard money line of credit. These investors do have to have some money themselves in order to be accepted for these loans, not in the least because they may have to float rehab costs as it can take a little bit of time before the lender pays out. Once renovations are completed, they sell the property and pay back the lender.

The second type of investor interested in private loans is the buy and hold investor.

Buy and hold is a passive investment strategy for which an investor buys stocks and holds them for a long period regardless of fluctuations in the market. An investor who employs a buy-and-hold strategy actively selects stocks but is not concerned with short-term price movements and technical indicators.

Typically, these investors use a hard money loan to purchase and fix a property. Once that is completed, they take out a traditional mortgage on the property itself and pay off their private loan. They then hold the property, either for them to live in or rent out to tenants and become a landlord. Buy and hold investors looking for a hard money loan generally purchase distressed properties, which means a traditional lender will not fund the deal. This means that they bridge the time period between buying and fixing the property and it becoming a property that a traditional bank would be happy to provide a loan for As such, the loan in this case can be seen as a type of bridging loan.

Qualifying for a Hard Money Loan

Whether you are a fix and flip or a buy and hold investor, one of the biggest benefits of the hard money loan is that it is so easy to qualify. The approval process is also incredibly rapid. However, you do have to be realistic about the serious financial commitment you are making.