What are hard money lenders?
Private investors whom lend their money out high rates that local banks won't do.
Hard money loans are easier to get and funded very fast at lighting speed. It is referred to especially with real estate investors as asset based lending. The collateral on the loan becomes the real estate. They are far from conventional loans, since the underwriting guidelines that private money go by are far different from your local banks.
For those seeking emergency funding sources, or that have situations that are time sensitive and need to close quickly in days not weeks for their money, hard money is a solution period! Credit scores or bad credit is not a factor for most cases, although there are hard money lenders that do look at a borrowers credit history and are credit driven but for the most part they are not credit based lenders.
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Based upon their own lending criteria, HMLs lend money on a short-term basis 6 months to 1 year to borrowers who use it for a variety of profitable purposes. These may include the following real estate loan types: bridge, refinance, development, acquisition, rehab, etc. Since Hard Money is more expensive than traditional sources (14%+ interest rate and 2-10 points+ in origination fees), borrowers usually have a financial gain from using hard money, so the high interest or points usually is offset by the financial gain.The loan cost is not an issue when they may make $150k and pay $30,000 to use their money, would you use it if you could make $150k and pay $30k to use it...
What Type Of Terms Can You Get With Hard Money Loans
These types of loans will vary from private lender to lender. Upfront application fee, due diligence fee and commitment fee may be charged and vary from lender to lender again. Generally they will fund a loan for 50% LTV on raw land and up to 50-70% LTV on the finished product, at an interest rate of 14%+ (depending what area of the country you are in at times ) and for a period of six months to three years. They will also charge between 2-10 points as an origination fee, to be paid out of proceeds. Can be interest only or amortized.
Some lenders will fund interest, origination fees, rehab money, etc.; others will not. Ultimately, when selecting a HML, borrowers will need to understand how these options fit best into their plans.
What Makes Private Money A Great Financing Source And Option?
Your local banks, credit unions fill a definite need for low cost money. Borrowers would love to use them for all of their needs and real estate deals. However, there is a market out there that traditional lenders cannot loan money on. That is where private money comes in and why they exist. They fulfill a need that local banks cannot fill due to government regulations, stricter underwriting guidelines, lower risk profiles, longer funding timeline, etc.
Top 10 Reasons To Consider When Deciding About Hard Money Loans
1. SUPER FAST SPEED
Can close in 5 - 14 days after they get all necessary documentation, banks can take up to 45-60 days.
2. DOCUMENTATION REQUIREMENTS ARE EXTREMELY LOW
Require documentation but not nearly as much as traditional lenders, fund based on the value of the property only and not the borrower credit standing.
3. BAD CREDIT NOT AN ISSUE
Bankruptcy, foreclosure and a FICO scores under 490-600 are no problem. Traditional lenders almost always require a great credit history.
4. VERY FLEXIBILE
Flexibility with loan structuring..awesome! Terms, interest reserve, draw schedules, cash out, financing carry, etc
5. GAP/BRIDGE FINANCING
HMLs are usually very experienced real estate lenders who understand that projects do not always follow the given plan. If a gap in funding exists and the loan and supporting documentation make sense, HMLs will typically fund. Whereas, IL's guidelines are typically not flexible and they turn down gap loan requests if borrowers get off schedule.
6. FOREIGN NATIONALS LOANS NO PROBLEM
Foreign nationals can get a loan with a hard money lender but will be difficult to get a loan with a traditional lender who have problems lending to nonus citizens.
7. WILL LEND ON HIGHER RISKY DEALS
Churches, non-profit are not a problem with hard money lenders, but are with traditional lenders who are concerned if they have to foreclose on a church loan, and the bad publicity they will receive.
8. PERSONAL GUARANTEES NOT REQUIRED
Loans based on the value of the property so personal guarantees are not necessary. Local banks always require personal guarantees.
9. FLEXIBLE LOAN TO VALUES (LTV)
They are more flexible then traditonal lenders being that they will decide what Loan-to-Values (LTVs) they will accept based on their affinity for the project, cross collateralization, possible equity participation, etc. Traditional lenders will turn down loans asap if ltv's are to high high.
10. SUBORDINATE LIENS
Hard money lenders will lend on a 1st, 2nd, 3rd or lower position, as long as, the value of the property is there. Local banks may do a 2nd, and hardly ever a 3rd. Typically, Traditional lenders always want to be in 1st position.
What Should You Expect With A Hard Money Loan
If you have a fantastic deal with a super LTV and can't go to a local bank because of bad credit, or need for funding in two weeks or faster. Now that you know and are informed about what is hard money and and value of concept of it you can send the loan to a private lender. You will pay more money for the loan bottom line then your local banker, but will be easier and quicker to close your deal.
Each deal is on case by case basis, unique; terms vary and each structure of a deal can be different. Lender criteria adjust based on the specifics of each deal, so borrowers will need to be flexible.
Here some things to keep in mind when applying for a hard money loan:
* Title insurance is a must
* All delinquent taxes, judgments, etc. and other liens on the property will typically be taken out of the proceeds unless specifically excluded.
* Insurance, typically, will add the lender as co-insured
* Fund control is always set up on construction, development and any loans which have budgets * Borrower will pay all closing costs, fees, etc. out of proceeds
* Many lenders require the property be put into a single asset LLC, which the loan is made to
* Borrower should be prepared to assign rents
* Interest, in most cases, at least partly will be reserved or prepaid
* Some HMLs require an upfront application fee, due diligence fee and commitment fee. Make sure you understand these fees and how they will be used and if they are refundable
* Almost all lenders require borrowers to have money in the deal. Additional collateral may be required by cross collateralize other properties to keep the LTV acceptable.
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