What is hard money?
Hard money loans are given to you when you have no place left to go. Your credit scores are abysmally low – below 620; consider the 300-400 range. You have a history of defaulting, late prepayments, missed repayments, bankruptcy (amongst your crowd of misdemeanors). No lender would take you on. Those are the worse-case scenarios. But you want that house.
Hard money lenders may consider you.
Because they look is the value of your property rather than your credit rating or history. Certainly, some may tally some of that, but at the end of the day the calculation is based on the worth of your collateral: how promising it is and whether it will offset the lender’s funds.
Hard money loans range from anywhere to $20,000 to $150,000, or more, depending on the lender’s funds. Most loans also cap at 3-5 years although you’ll be able to find some who offer options for longer terms or for subsequent payments. Loans also differ. You’ll find a variety from commercial to rehab to so-called Social Lending and personal business. These are the most common.
Hard money loans are also called ‘bridge’, ‘rehab direct loans’ or ‘personal’ since the hard money lender provides you money that bridges your need, be it for fixing or for buying a home (or related emergencies) and he or she loans from his own pocket. The advantages of the hard money scenario are that the process is flexible, smooth and fast. Lenders set their own terms and schedules that are usually adjusted to suit you. Meager paperwork is filled out and the whole occurs within as little as 7-10 days. Disadvantages largely consist of the high rate of interest and the low loan to value ratio. Hard money lenders need to be certified by organizations such as the American Association of Private Lenders (AAPL), through their state regulatory agency and through the National Mortgage Licensing System (NMLS).
Definitions that you may need to know
Bridge loan – This is a short-term loan to “bridge” the interval between buying one property and selling another. A typical bridge loan is for a short-term loan of 6 months or less, though time frames vary.
Rehab loan – This is a short-term loan made to improve a property for refinancing or selling. Borrower shows lender the construction milestones and results as he progresses with the construction; funds (that are held in escrow) are released accordingly.
Residential loan – This type of loan is for buying a private property – usually one that you want to live in. Consumer protection agencies and federal governments have issued a slew of regulations that protect you. More are coming out whilst I’m writing this.
Commercial loan – for buying property that you want to fix and flip for commercial purposes. These usually involve greater risk since they are more expensive to buy and involve years of drawn out and costly labor. Banks are more reluctant to support these; hard money lenders are generally more agreeable since they tend to promise more profit.
How hard money deals work
You’ll wants to draw up a business plan specifying your experience, promise of the property and why you think it’s a promising investment. The lender will examine the deal, analyze the properties and qualify you. If she approves you, she’ll charge you fees plus interest. You’ll be signed up for a balloon payment schedule which means that you’ll be repaying slightly larger amounts of repayment with a significantly huge payment once your loan reaches maturity. Failure to make this repayment means that the lender pockets your collateral. You can also choose whether you want to return regular monthly payments or pay one lump sum of interest at the end.
The pros and cons of investing in hard money
- Your rate of return is invincible to stock market fluctuations, global politics, or even long-term real estate trends.
- No need to purchase or manage the real estate property that you have invested your funds in.
- You can earn proven, predictable rates without tying up your money for years at a time. (Private investors are generally offered a set rate between 6-14% annualized with no fee, though terms vary according to lender and individual deals.)
- You have absolute control over your loans. You choose your borrower and investor. You decide whether or not you want to lend to certain clients. You also select your funding partners.
There are also disadvantages of becoming a bridge loan or hard money investor:
- Research is required: You’ll need to have an excellent understanding of real estate laws and property values to succeed in this hugely risky field. It’ll be far more worth your while to get the services of a proven, reputable company who finds, analyses, and puts together the deals.
- Time frame: You’ll need to keep re-applying for one bridge loan after another (since each has short term applicability). Ideally, you’ll be working with a company that you can do many transactions with over time.
- Risk: All investments take risk but this one is particularly risky especially if “Murphy” shows up – your income plunges, market turns, your partner divorces, child dies – who knows what fate has in mind for you. Result: you lose funds and property.
The bottom line is this:
Every effort is made to guard the investor’s original investment, and if possible, the interest owed as well. However, it may take longer than anticipated, and the only real guarantee you have is the value of the home. While that may sound like less-than-a-sure thing, consider these facts to put the risk in perspective
Bridge Loans and other hard money loans can be safe, reliable investments when properly vetted and executed. Banks have been executing these kinds of loans for years until it become less safe for them to do so. Private individuals then took over. if you want to become a hard money investor, you may want to consider hiring a private lender who will carefully screen your ability to repay and the value of your property. The key too is for you to find a reputable and transparent lender who is open to you about terms, sets convincing rates. Also make sure you can repay.