So many first time home investors are curious about hard money lenders. What are they? What do they do? How do they differ from banks? What are their risks? Can I trust them? How do I find them?
First of all, let’s run through the difference between soft and hard money. When investors talk about soft money they refer to funds that are relatively easy to qualify for and whose terms are more flexible. Hard money on the other hand is the opposite. Its terms are more strict and specific. Not that it’s harder to get, but they are more rigid. This has to be so since ‘hard money loans’ come from private individuals – therefore they’re also called private loans – who fund this money from their own pockets. They want to protect their money. (Wouldn’t you?) These individuals – hard money lenders – conditionally lend to people who were rejected by their banks. Hard money lenders may loan the required sum after placing certain conditions that protect their investment.
Terms for qualifying for a hard money loans.
Times have changed for hard money lenders and terms have changed too. It used to be that most hard money lenders would focus on equity and omit evaluation of credit or customer’s work history. This was the selling point of hard money lenders. People needed money and fast. Private lenders seemed a feasible option since they evaluated property rather than FICO score.
Unfortunately, some private lenders trapped misinformed borrowers in a cycle of steeple-high payments that culminated in property loss. Government and consumer agencies passed protecting laws called ‘predatory laws’. These and similar regulations drove hard money lenders to tighten their dealings and today most money lenders require more than equity to qualify. A cursory look at our loan submission form for instance shows that HML Investments ask you questions about your collateral. These include property type, condition, estimated property value and so forth. We also want to make sure that you can afford our terms. Accordingly, we ask you for your yearly income, the type of work you do, your credit score, real estate assets owned, and so forth.
In this way, most hard money lenders including us have become little different than a bank. Our chief benefits lie in the fact that we lend you money far faster than banks do (think of a 7 day turnaround in contrast to the 60+ days of the bank) and that we sometimes forgive bad credit if we think there is reason to do so.
It’s good to know what the terms are when dealing with hard money lenders so that you can find one who meets your needs. Typically lenders will only loan you up to 70% ARV (after repaired value). This may also be known as LTV (loan to value) i.e. approximated value of your property. So if you find a home worth $45000 in its present condition, need $20,000 to renovate it, after which you could plausibly sell the home for $100,000, the lender may lend you up to $75000 which would cover the cost of the house and repairs. Recently,
AlternativeLendingMagazine.com, the largest source for direct money loans and direct money lender programs in California, reported that more and more hard money lenders are hiking their rates. A cursory look at the latest reports from random online California lending agencies show that one or two individuals or organizations even offer LTVs at 100% of the appraised value.
Hard money lenders accompany their loans with high interest rates that range to 12% – 20% annually and can last for 6 months to several years. Rates depend on your credit score and experience and you’ll receive monthly payments of only interest or interest and some principal with a balloon payment at the end of the term. You’re likely also to be faced with closing costs where hard money lenders will charge you anywhere from 2-10 points just to use their money. One point equals one percent of the mortgage amount. So charging one point on a $500,000 loan would be $500. Hard money lenders differ on rate of interest and points, so you may want to compare rates before selecting.
Other aspects to consider
Most people tend to consider hard money lenders because they need the fast turnover such as for fast flipping or rapid bidding on a vacant building. You may want to ask your lender how quickly funds will be available. Hard money lenders tend to have their own processes. Some will ask you to fill out forms that include W2 or tax returns, your most recent pay stubs, and bank statements. Others may simply adopt the old fashioned way and drive by to inspect your building. Again, it depends on whom you work with.
When should you use hard money loans? Most borrowers tend to appeal to hard money when they’re looking for a fast turnover, are unable to land money from the banks due to bad credit rating or other circumstances, or simply don’t have the money. A majority of the clients tend to be first-time investors. Some find hard money loans attractive. Sure it’ll cost you money to borrow the money but if you land enough money to buy the property, fix it up and then sell it under market value for a profit you may find that the rewards outweigh the expense.