While hard money providers are legitimate businesses, they are prone to an undeserved bad reputation. Nevertheless, they have become an essential player in the non-conventional lending sector. Mainly, they are a good option for property investors who need quick cash loans.
If you can’t pay for a property using your savings, a hard money lender can offer the funding you seek. And while hard money lending has unique advantages, there are some facts you need to know about this form of financing.
Hard Money Lenders: Who Are They?
They are companies or private investors that provide funding to borrowers. Typically, you don’t find hard money funding from a bank.
Notably, the lenders don’t follow the same regulations subjected to traditional lenders. As such, they are at liberty to tweak the borrower’s hard money loan requirements when underwriting loans. Due to this freedom and flexibility, you can find multiple lenders willing to work with you even when traditional banks have denied you a loan. Unlike conventional lenders, hard money investors aren’t obsessed with your creditworthiness. Instead, they are interested in the property’s value you want to purchase.
Hard Money Down Payment Requirements
Like conventional mortgages, most hard money providers require borrowers to put in a certain amount of their own money before getting the loan. While the exact amount for the down payment can vary from lender to lender, most hard money providers require at least 10% of the property value. However, lenders use the Loan-to-Value ratio of the real estate when calculating the down payments.
In this hard money loan example, if a property’s appraisal value is $200,000, the lender can offer up to a 90% LTV ratio. This means the loan will be $180,000, and you will have to pay $20,000 as a down payment. However, some lenders can use the After Repair Value (ARV) to determine the down payment. This approach is quite attractive if the borrower doesn’t have enough money to perform all the necessary repairs to sell a property at a good profit.
Nevertheless, lenders that use ARV tend to impose higher interests to account for the higher risks of hard money lending. When a lender provides 100% financing, they also ask for higher fees and interest. The exception may come when you are an experienced investor with a proven track record of using a hard money loan.
Hard Money Loans Interest Rates
Unlike conventional mortgages, hard money funding often comes with higher interest rates. According to a recent survey by Freddie Mac, the average interest rate for a traditional bank mortgage is about 3.01%. On the other hand, hard money interest rates can be anywhere between 8% and 15% –which is five times the interest rates for bank loans. Generally, this happens since some real estate investments tend to be high risk.
Most importantly, bridge money lenders don’t conduct stringent vetting when issuing money loans. This aspect makes hard money more appealing to people with poor credit ratings.
Hard Money Lenders Terms
Typically, hard money is short-term funding that should be paid back in about six months. This tends to be suitable for property investors dealing in short-term investments that can upgrade and sell the property for a good profit. Therefore, it’s essential to make sure the renovation happens quickly and the real estate turned for a profit immediately. Otherwise, any additional loan payments will eat into your profits.
However, most hard money offers terms that range from several months to a few years. But they are only ideal when you want to keep the property for a few months before selling.
Some lenders may require a balloon payment on the loan. This means the lender requires you to pay the entire principal amount when the loan term expires. If you can’t pay the loan in full, you might need to refinance or pay hefty penalties for late payment. And since hard money funds are secured by the property in question, the lender can legally take over the property if you fail to pay.
Speed and Flexibility of Hard Money Lending
Hard money financing is mostly meant for people with limited access to traditional loans. These loans are great when you need money within a short time since the turnaround time is faster than conventional funding. The speed is useful when you want to acquire a property quickly in a competitive market.
Unlike traditional loans, hard money funding is customizable, and most features can be personalized to meet your specific needs and situation. These features may include funding requirements and repayment terms. Hard money is ideal for borrowers with multiple active mortgages, which is characteristic of real estate investors.
Hard money lending provides funding to people who find traditional financing impractical. Nevertheless, they have higher interests and risks. As such, it’s crucial to understand how a lender works before you dive in. Ideally, it’s prudent to compare several providers before working with hard money lenders.