Tuesday, September 20, 2022

What Is Hard Money Loan

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Should I Give A Deposit To A Hard Money Lenders

What Are Hard Money Loan Requirements

Prospective borrowers for a hard money loan should think carefully before paying a deposit to a lender if a loan is for a single family home renovation there should not be a deposit charged. However, for larger, more complex transactions with a lot of underwriting requirements, payment of a deposit is more warranted.

What Are Hard Money Loans Used For

Hard money loans are most often used to buy property. Though in most ordinary cases, a traditional mortgage is likely a more financially stable option, there are times when a hard money loan may come in handy.

  • One common use for hard money loans is in real estate investing, and specifically house-flipping. Thats when someone purchases a run-down home, fixes it up, then sells it, hopefully for profit. Hard money loans can be useful in that case because the term that borrowers have the loan is short just until theyre able to fix and flip the property, then sell it.
  • A cash bidding battle may also be a case where a hard money loan can be handy. Say you absolutely want a piece of property, but dont have the time to go through the intensive and time-consuming mortgage application process. A hard money loan can be approved quickly, getting you the cash you need to put down a competitive offer, and so can be used as a bridge loan. There are risks associated with this, though, which well cover in the next section.
  • Hard money loans may also be used by those who simply want to purchase property but do not have the credit to afford a traditional mortgage. If, for whatever reason, youre flush with owned tangible assets but have a lackluster borrowing history, a hard money loan could be a plausible workaround. This may be a higher-risk option, however, because, unlike a traditional mortgage with a 30-year repayment term, a hard money loan may only have a 3-year term.

Risks Of A Hard Money Loan

Once you can answer what is a hard money lender, you might be tempted to contact one. But you should use caution if you decide to go the hard money route. Make sure you take the time to look into the reputation of the hard money lender, and have an experienced real estate attorney review the paperwork. While there are many legitimate lenders of hard money offering loans, there are also predatory ones who try to take advantage of borrowers.

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What Kinds Of Property Do Hard Money Lenders Lend On

Hard money lenders will lend on both commercial and residential properties, although many will not lend on owner-occupied residences due to higher thresholds of scrutiny required by law. Commercial properties can include industrial, shopping centers, and office buildings. Some, but not all, hard money lenders will also invest in raw land slated for development and even hotels.

Vacation homes , even if not a primary residence, are considered owner occupied and may or may not be financeable depending on the lenders criteria regarding owner-occupied home loans.

Plan Your Future Steps

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Its important to consider your future steps and how you will grow your real estate business. One of the best strategies for doing this is known as BRRRR: buy, rehab, rent, refinance, repeat. This strategy involves buying an investment property, renovating it, renting it out, refinancing the loan to take cash out, and then repeating the process. Not only does this strategy help you grow your real estate portfolio quickly, but it also allows you to reinvest the money from the refinance into future projects.

So if youre thinking about taking out a hard money loan, be sure to consider how it will fit into your long-term plans for growing your business.

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How Do You Work Out The Total Interest Paid On A Hard Money Loan

To work out the interest on a hard money loan youd take the loan amount and multiply it by the interest rate offered. In other words, if you are offered a $100,000 loan with an 8.5% interest rate, the total interest paid would be $8,000 . Similarly, if you were offered a $300,000 loan with a 7% interest rate, the total interest paid would be $21,000.00 .

How Does Trust Deed Investing Relate To Hard Money Lenders

Trust deed investing and hard money lending are closely related. Trust deed investors are one of the sources of capital for the private money loans made by hard money lenders. Brokers work with trust deed investors to fund hard money loans for borrowers. In the case of funds that make private money loans, the funds can be said to be making trust deed investments when they fund a loan. For more information about trust deed investing, please see our Trust Deed Investing FAQ.

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What Is The Business Model Of A Hard Money Lender What Is A Hard Money Lender

Hard money lenders use private capital to fund loans secured by real property. The business model is fairly straightforward there are one or more investors on one side of the deal and a borrower on the other the entity issuing or brokering the loan must charge the borrower enough to pay the investor the return they are seeking and retain enough to cover their own overhead and desired profit margin.

Finding Hard Money Lenders For Real Estate Investing

What is Hard Money Lending?

Many new investors fret over how they will find hard money lenders to get moving on the financing of their project. But here are a couple of simple ways to approach this:

  • REIA or MeetUp Meetings: Often hard money lenders will speak at local real estate events. If not, ask fellow members to see if they know any trustworthy lenders.

  • Real Estate Agent or Traditional Lender: Ask that realtor, or mortgage broker, in your real estate network if they know a hard money lender you could do business with.

  • Google Hard Money Lender: Just be careful, there are some unscrupulous individuals out there. Be sure to ask for references and talk to fellow investors to get their opinion.

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Hard Money Loan Takeaways

Before you go, keep these hard money loan takeaways in mind, and remember to consider them before taking out a hard money loan in the future.

  • Hard money loans are usually real estate loans used to purchase homes or land quickly, as these loans do not take as much time to complete as a traditional mortgage.
  • Instead of using your credit score and other financial factors to assess trustworthiness, hard money lenders lend you money against collateral.
  • Hard money loans typically have much higher interest rates than mortgages, frequently in the double-digits.
  • Many use hard money loans to fix and flip houses, though this comes with some risk.
  • They are also useful to those with lower credit, but its important to remember that hard money loans can be highly risky. Check out our post for tips on how you can improve your credit score.
  • Ultimately, they have specific use cases where they may be a plausible option, but on the whole carry a significant amount of risk, and are expensive.

What Is The Purpose Of A Letter Of Intent

The purpose of a Letter of Intent for a hard money loan is to provide a quick means to be sure that both the prospective borrower and lender are on the same page. Although this document is not legally binding on either party, it serves to put the prospective deal in writing and helps to avoid any miscommunication or misunderstandings.

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Find A Reputable Lender

If youre actively involved in real estateor hoping to beyoull want to make sure there are some reputable hard money lenders already in your network, so you dont have to scramble to find a good one whenever you have a deal on the proverbial ice. Some hard money lenders are genuinely interested in helping you finance your project, while others are pure loan sharks.

There are a few barometers you can use to gauge how trustworthy a lender is. Do they have a professional-looking website, or is it simply a landing page for gathering your personal information to pass on to a third party? What do other investors say about this lender? Are there any outstanding lawsuits against them? Do they have a portfolio of past projects? Can you meet them or a designated agent in person? Many genuine hard money lenders will want to see the property youre offering as collateral.

Some lenders might only focus on specific types of projects. For example, if they finance hospitality ventures like hotels, they may be reluctant to finance other types of commercial real estate or residential real estate. Knowing which lender is best suited to your particular project will help everything move faster and more easily.

What Happens If I Cant Repay My Hard Money Loan

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Defaulting on a hard money loan or any conventional loan can significantly impact your credit score. Regardless of the type of loan you choose, if you default on a loan, it can substantially affect your ability to obtain loans or credit in the future.

Defaulting on your hard loan repayment also means you lose the asset you put up as collateral. The lender can sell your property for any amount they choose to cover the loans value and any accrued interest. Unfortunately, this can mean a considerable loss to the borrower, even if the agreement allows the borrower to get the balance for sale minus the loaned amount and interest. The lender will have no interest in looking for the best price but will only see that his investment has been fulfilled.

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What Is A Private Money Real Estate Loan

Here is a list of just some of the reasons a Private or Hard Money Mortgage might be right for you:

  • You have bad, or simply challenging credit
  • You have decent credit, but for some reason, your credit score is lower than the requirement set by the banks
  • You have difficulty documenting your income, you havent filed current tax returns, or are simply self-employed and you need a lender to look at your income situation in a different way
  • Your property is not in good shape and needs to be rehabbed or renovated
  • Your property type is commercial or has a commercial feature that does not conform to Fannie or Freddie Mac Standards
  • You are trying to buy a property that has a nonconforming element to it such as a storefront or illegal rentals
  • You have more than 4 current mortgaged properties
  • Your current property is not fully rented
  • You need cash to purchase another property
  • You need cash for business purposes
  • You need cash to back real estate taxes
  • You need cash to pay bank IRS or State tax liens
  • You would like to pledge multiple properties in order to get a loan
  • You are purchasing a business that does not have an established cash flow such as a new bar or restaurant
  • You have been turned down by a Bank, Credit Union, or traditional credit union
  • How To Get A Hard Money Loan

    With hard money loans, the lender approves a borrower based on the value of the property being purchased.

    The lender may do a quick check of your credit or finances, but in general, the process will be much less rigorous than with a traditional loan. This allows the process to happen more quickly so borrowers can get their money in a matter of days instead of weeks or even months.

    The downside of this process is that the lender takes on significantly more risk, which translates to a more expensive loan for the borrower. Hard money loans typically come with high interest rates, and lenders might require larger-than-average down payments .

    Hard money loans also tend to have short repayment periods often just a few years. Compare this to traditional mortgages, which commonly come with 15- or 30-year terms.

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    Hard Money Loan Rates: How Theyre Set

    The approval process for any loan breaks down to this: the lender reviews all background information to determine if you can reasonably commit to making the necessary payments. In the case of a hard money loan, the lender is not digging into your financial background, so they are automatically taking a higher risk that you will default on the loan. Hard loan lenders take this risk because the home is listed as collateral, meaning they can resell the property themselves if the borrower cannot follow through on their loan repayment.

    This higher risk is the primary reason for higher interest rates in hard money loans. In general, interest rates range from 2 10 percentage points higher than traditional mortgages. As of 2020, the average interest rate for hard money loans is 11.25%.

    What Is ‘hard Money’ In Real Estate Investing And How Does It Work

    HOW HARD MONEY LOANS WORK

    Award-winning real estate coach, author, co-founder of the Ligon Brothers & co-creator of LYNK Wholesaling.

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    The term “hard money loan” refers to a type of loan that is backed by a hard asset, such as real estate. If youre a real estate investor or house flipper and you need financing for a deal, a hard money loan might be a good option for you to explore.

    But as a real estate investing coach who often helps clients navigate the hard money transaction process, I know it’s important to first understand the ins and outs of these loans before making a final decision.

    What is ‘hard money?’

    Hard money is a type of lending often used in real estate investing. Hard money loans are also known as asset-based loans, bridge loans or STABBL loans . Hard money loans are used for short-term financing, and the loans are always secured by an asset. Traditional financial institutions dont offer hard money loans, so this lending option is only available through private lenders and individual investors.

    As I mentioned above, hard money loans are often used by real estate investors, house flippers and real estate developers. These types of loans can be a quicker and easier way to secure an investment purchase without the need for traditional financing or the approval process that is required by typical financial institutions. Since these types of loans are asset-based, they are not contingent on the borrower’s creditworthiness.

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    What You Need To Know About Hard Money Loans

    Small and large companies take advantage of commercial financing. This enables business owners to improve operations while acquiring their own commercial property. And once you own your business property, you can lower your expenses by avoiding rental costs.

    While banks and credit unions offer commercial loans, not everyone can access them. Traditional commercial mortgages impose stringent underwriting procedures that take a long time to get approved . They require high credit scores and proof that your company has enough cash flow to repay the mortgage. For these reasons, borrowers with low credit scores or history of default do not get approved.

    If you cant secure a traditional commercial loan, you can turn to hard money lenders. These are private investors who offer financing based on the property you are using as collateral. But how do they work?

    In this article, well talk about hard money loan requirements, its payment structure, and rates. Our guide will also discuss when it makes sense to obtain a hard money loan along with its pros and cons.

    What are Hard Money Loans?

    A hard money loan is a type of commercial mortgage provided by an independent investor, such as a company or individual. It is usually taken for a short term of 12 months to 3 years. But unlike commercial loans from banks, hard money loans are based on property being used as collateral rather than the borrowers creditworthiness.

    Your Investing Experience Matters

    Hard money loans are a great option for experienced investors, and more experience in the business means lower rates. Typically, the more loans you repay successfully, the better your interest rate will be. So if youre just getting started in real estate investing, dont be discouraged if your hard money lender doesnt offer the best rates at first. As you build your track record, youll be able to get financing that reflects your expertise.

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    What Are Other Options

    There are other ways to finance an investment property, and some may offer more favorable rates and terms than hard money loans. These include:

    • A second mortgage: If you’re a homeowner, you may be able to get a home equity line of credit or home equity loan. The interest rate may be much lower than what you’ll pay for a hard money loan, but you’ll also be putting your current home up as collateral.
    • Borrowing from friends or family: You may be able to raise funds from friends, family members or other individuals who are interested in funding your deal. While they may agree to favorable terms, you need to be clear about the risks involved and consider how the loan could impact your relationship.
    • Government-backed loan programs: The U.S. Federal Housing Administration and the Department of Veterans Affairs have loan programs that are worth looking into if you’re planning on buying and living in a multi-unit property. The Small Business Administration also has loan programs for small business owners who want to purchase commercial property.
    • Seller financing: In a seller-financing scenario, the seller acts as the lender in the real estate purchase. This kind of financing is rare, but could be an option for someone with less-than-stellar credit. Seller financing can also be a risky approachpotential negatives include high down payments and less buyer protection than traditional loans.

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