If hard money lending is new for you and you’re wondering whether or not to commit yourself, this preview gives you some tips on getting started.
The term hard money loans seems intimidating to some – maybe it’s the term ‘hard’ – but actually the system is similar to traditional bank lending with the exception that the lender focuses on your property rather than on your FICO or credit history.
Here are some tips as starters
Read all you can on the subject: In short, hard money lenders loan from their own pockets therefore they charge you a higher interest rate and lower loan-to-value (LTV) rate than banks do. Most people choose them because they focus on collateral rather than credit and may therefore give you a loan when banks reject you. Their terms tend to be more flexible and their turnover rate is faster tilting towards a week rather than the month and more of the bank.
Borrowers also find the underwriting process to be more convenient. There are fewer forms to fill out and fewer details needed. On the other hand, the high cost of repayment causes approximately an annual 60% of borrowers to default. When this occurs, hard money lenders can retain your property. For these reasons, hard money loans are known to be risky. Some borrowers choose lower loan terms (such as two years instead of five) to diminish the risk. Borrowers who can repay often find these loans profitable in that their ventures show return on capital.
Terms that you’re bound to bump into are the following
LTV – The amount of outstanding debt on real property divided by the fair market property value. When a lender determines the value of a property being purchased, he considers the lower of the purchase price or appraised value and sets his rate accordingly. So if you purchase a property for $100k and it appraises for $150k, the lender sets his maximum LTV as a percentage of the $100k price. LTVs range from 60-80%. You may find some that are higher.
Bridge – Hard money loans are often confused for bridge loans. There are differences. Bridge loan often refers to a commercial property or investment property that may be in transition and does not yet qualify for traditional financing. Hard money loans, on the other hand, are also often applied to for distressed financial situation, such as arrears on the existing mortgage, or where bankruptcy and foreclosure proceedings are occurring
Maturity Date – The maturity date is the date your loan is due and payable. If you get a short term bridge loan, your maturity date may be in as little as 6 months or a year from now.
Amortization – Amortization is an accounting term that refers to the process of allocating the cost of the loan over a period of time. Many private money loans will typically be interest only because they are for a shorter duration than bank loans. Your lender will set up an Amortization Schedule which a table is showing the breakdown of amortized loan payments into principal and interest portions as well as the remaining loan balance after each payment.
Points – Points are finance charges paid at closing. Each point equals 1% of the loan amount.
Some lenders charge a flat fee, rather than points. For example, 1 point on a $100,000 loan is the equivalent to $1,000.
Promissory Note – The document which obligates a borrower to pay a debt at agreed upon terms.
Are you ready?
Consider yourself the sales professional! You want to convince him to that your property is worth his investment so that he’ll loan you the necessary funds. How do you do this? Draw up a business plan. Show him potential returns for his investment. You may want to illustrate this with numbers, graphs, figures and back it up with sources.
Sales professionals want to know whom they’ll be speaking to in order to slant their pitch to the client. In your case, you’ll most likely be prospecting the principal owner or manager of the firm. They are very knowledgeable and helpful about what is and is not possible regarding your project and exactly what they can do for you. It is strongly recommended to develop a long-term relationship with them, even if you are seeking capital for a quick rehab!
How to find your lender….
Some find this the most difficult step of all. After all, you want a person whom you can talk to, someone who’s honest, preferably someone who matches your style – whom you feel comfortable with. You’ll also want someone who is patient, transparent, and relatively reasonable. You may have other condition such as fast turnover, flexible repayment terms, a certain LTV and lender who specializes in your loan type. Work out ahead of time what you’re looking for.
Borrowers find a lender in various ways. They network, look online, ask their librarian, or approach a consumer agency.
If you’re looking for a lender in California one way to do so is by paging through the many online directories on hard money lenders. You can search for a lender by:
Location (e.g. Kansas, California, Georgia),
Loan type (e.g. rehab, apartments, hotel ), or
Keyword (e.g. construction loan, bridge loan, rehab loan or land loan).
Interview one or more lenders and assess the results. Do you feel comfortable with the lender? Does he meet your conditions? Does he seem professional and is he certified? Has he serviced similar clients? Can he meet your requirements? Do they see as much potential in your pitch as you do? Think it’s a good match? Then shake hands and good luck.
There’ll be some forms to complete. The lender will likely investigate your credit, work and collateral credentials to ensure that both of you will be satisfied. He’ll want to know your plans and the estimated value of building. He may also visit the property to assess it for himself. You may want to hire a lawyer to help you ensure the most profitable outcome.