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Investment Property Financing, LLC

Loan & Thrift
4158 Summer Ave
Memphis
TN  38122
(901) 844-3333

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What is a hard money loan?

 

A hard money loan is a short-term loan that uses real estate as collateral. The money for the loans come from private investors instead of traditional lenders like credit unions and banks. The length of the loans are generally around 1 year, but loan terms of 3 to 5 years are available in some situations. The borrower is typically required to make monthly payments while the loan is outstanding. Because hard money loans are short-term, they require a balloon payment that is due at the end of the loan term.

The loan amount the hard money lender is able to loan to the borrower is determined by the value of the property being used as collateral for the loan (multiple properties may be used as collateral for one loan). The property used as collateral could already be owned by the borrower or it could be a property the borrower is purchasing.

The value of the property being used as collateral for the loan as well as the borrower’s equity in the property are the primary concerns for the hard money lender. The credit of the borrower may be considered by the lender, but credit issues alone usually aren’t enough to prevent the borrower from receiving a hard money
loan. Other issues on a borrower’s record such as recent foreclosures, bankruptcies, short sales or loan modifications can also be overlooked by hard money lenders. Borrowers who are unable to get a traditional loan from a bank or credit union may still be able to receive a hard money loan.

What types of real estate transactions should hard money be used for?

Hard money has traditionally been used by real estate investors for loans such as fix and flips, cash outs, refinancing, investment property loans, construction loans and land loans. These are situations in which banks are reluctant to lend or not able to provide financing at all. Other lesser known types of hard money loans include estate and inheritance loans.

 

Hard money loans are not needed for every situation. When a borrower is looking to purchase their primary home and has good income history, credit and no problems on their record (short sale, foreclosure, bankruptcy, etc.) they should pursue a traditional bank in order to get the lowest financing costs available if they have time to go through the longer application and funding process.

Who should use hard money loans?

Hard money loans should be utilized by borrowers when financing from banks or credit unions is not possible or the borrowed funds must be received in a short amount of time. Traditional lenders generally take 30-45 days to fund while hard money lenders take 5-10 days.

Real estate investors use hard money loans for a variety of reasons. The primary reason is that hard money lenders are able to fund the loans quickly and fund requests that a bank would not even consider. Reliable hard money lenders can fund loans within a week in many cases. Bank loans can take up to 30-45 days to fund. Hard money lenders are able to approve a loan application same day in most situations. The approval process at a bank or credit union could end up taking weeks.

Real estate investors understand that being able to get loan requests funded within a week with hard money is a massive advantage versus having to wait up to a month and half with a bank loan. When a real estate investor is attempting to purchase an investment property and there are multiple competing offers, offering a quick close with hard money financing will help the investor’s offer stand out and get accepted.

Because hard money loans are for short-term use only, a borrower who utilizes a hard money loan to purchase a primary residence would be expected to attempt to fix any issues on their record (or simply wait until enough time has passed) so they could qualify for a traditional bank loan and refinance out of the hard money loan in the future.

There are other specific situations which perfect for using hard money such as an inheritance or probate loan against an estate. This involves allowing heirs of an estate to borrow against property within an estate until the assets are distributed or allowing heirs to split ownership of a property that one heir wishes to maintain ownership of while another heir would rather have cash.

Hard money loans for various property types

Hard money loans are available for most all property types:

  • Residential (single family or multifamily)
  • Commercial
  • Land

Many hard money lenders tend to specialize in a specific property type and this will come up early in the initial conversation between the borrower and lender. If the lender isn’t able to lend on a specific type of property requested by the borrower the lender may be able to refer the borrower to another lender who can fund the request.


Loan to value (LTV) ratios for hard money loans

The loan to value, or LTV, is simply the loan amount divided by the value of the property. This ratio determines the amount the lender is able to loan on any given property. Hard money lenders typically are able to lend up to 75% of the property’s current value. Lending based on the current value of the property is considered more conservative as some hard money lenders lend based on the after repair value (ARV). Lending on ARV is for fix and flip / rehab loans. The loan amount available to be loaned is a percentage of the estimated value of the property once the borrower has finished making the improvements to the property. Borrowing against a future value increases the risk associated with the project and decreases the amount of equity committed to the deal by the borrower. This increase in risk will result in higher lending costs for the borrower.

Some hard money lenders lend a high percentage of the ARV and finance rehab costs for the project. Borrowers who need this type of loan are often financially weaker than borrowers who use current value loans, and end up having to pay much more in lending costs. Some borrowers try to fix and flip properties with no funds at all but hard money lenders do not want to fund these types of requests.

Hard money loan interest rates and points

Hard money loan interest rates and points will be different for each hard money lender. There is no set standard and hard money lenders adjust their pricing in order to be competitive in their market. Different regions of the country can have drastically different hard money loan interest rates and points.

Because hard money loans are perceived as being riskier than traditional bank loans, the interest rates for hard money loans are higher than for traditional loans. Hard money interest rates typically range from 9-13% depending on the lender and perceived risk of the loan scenario. Points generally range from 2-5% of the total loan amount. Points and interest rates can fluctuate significantly depending on the request loan to value ratio.

What does a borrower need to receive a hard money loan?

Hard money lenders are predominantly interested in the value of the property being used as collateral as well as the amount of equity the borrower has invested in this property when considering whether or not to fund a hard money loan. The borrower’s credit is of some importance but not the most significant factor when analyzing a potential deal.

The borrower must also show that they have sufficient funds to make the monthly loan payments and for rehab costs if the loan is for a fix and flip project. The borrower will also be required to explain their exit strategy for the hard money loan, whether it will be selling the property, refinancing with long-term financing or raising cash from another source in order to pay off the loan.