A Hard Money Loan – What is it?
There are two terms that investors use when discussing money – soft and hard money. Soft money loans are typically made by banks, mortgage companies, credit unions and similar institutions. Soft money funding for conventional loans takes around 30 days or more to obtain. The hallmark of a hard money loan is that it is made with private funds. That is the reason hard money is commonly called private money.
Private investors with a lot of money at their disposal provide the funding to make hard money loans. For them, it is a more lucrative alternative to the stock market, an IRA or 401k plan.
Video: 7 Things to Get You Approved for Hard Money Loans
The term hard money is also derived from the restrictive nature of a hard money loan as opposed to the flexibility and dynamics of a soft money loan. Hard money loans have consistent, specific terms as opposed to soft money loans that allow for flexibility with terms that are varied. Hard money loans are a tool real estate flippers often use to obtain fast money in order to quickly purchase, repair and sell property for a profit.
One thing to keep in mind regarding hard money loans is that you don’t want this to be a long-term solution. These types of loans are often called bridge loans. Those who intend to purchase the home to live in it may want to obtain a hard money loan in order to get a loan to fix up the property. Once it is repaired, they will apply for a traditional mortgage based on the current market value. The hard money loan acts as a bridge for the homebuyer to get the property improved to current market value and to be considered for a traditional mortgage.
Current Trends to Get a Hard Money Loan
Hard money loans are most often used for short-term real estate loans. They have specific requirements that must be met. Current trends of hard money lending typically include the following requirements:
Hard money lenders will not loan more than 70% of the after repair value (ARV) of the home or property, although, typically less.
While hard money lenders used to base the loan strictly on the ARV of the home, some now require a credit application, along with W-2 income, most recent paystubs, recent year’s tax return and bank statements.
Property must be purchased below the market value in order to be considered for a hard money loan. Example: A home is expected to be worth $100,000 after it is repaired. The home needs $10,000 in repairs and you can purchase it for $50,000. That’s $60,000 that needs to be invested in order to purchase the home, which is 60% of the ARV. You should be able to obtain a hard money loan to purchase this home.
Hard money loans typically have high rates/fees – originating fees may be as high as 5% of the loan, and interest rates can exceed 20%.
Sometimes hard money lenders will require you to front the cost for the rehab work, and then reimburse you after the home is completed and passes all inspections.
Due to the current economy, you may have to come up with 20% down.
Secrets to Getting a Hard Money Loan
There are secrets that you will need to know and strategies that you need to use to find hard money lenders. These strategies will improve your chances to obtain a hard money loan and become competitive in the real estate market. Below are some of those secrets and strategies:
Buy business cards with your name/company name on it to enable quick networking whenever you run into someone who may be interested in funding a hard money loan.
Talk about your new business venture to everyone you know. They may run into someone, or run into someone who knows someone who may want to invest in your venture.
Call local mortgage companies and ask for referrals.
Contact local real estate agencies and ask for referrals. Real estate agents can only benefit from a sale if they can connect you with someone that will fund the sale for you. Some real estate agents work directly with private lenders and can help you connect quickly with one.
Call local title companies and ask for referrals. They work with home buyers and sellers all day long.
Video: Hard Money Lending Seminar
There are local real estate investors clubs in most major cities. Find out how to get in contact with these clubs and become a member. Network and build relationships within these groups.
Search the Internet for reputable hard money lenders. You’ll want to research their reputation before you accept the loan. Contact your Attorney General’s office in the state where the individual or company is headquartered. The Federal Trade Commission (FTC) website is also a good resource for checking out the reputation of hard money lenders.
Shop around for the best deal. Get financial requirements and quotes from several hard money lenders before you decide on one.
Keep in mind that the less you need to borrow, the more likely you’ll get the loan, and the less you will be responsible for if the home does not sell quickly.
If the best deal will be with a hard money lender who requires a great credit score, better check yours out before you apply.
Before deciding on an investment home, consider the subdivision or area in which the home is located. Is it a fairly populated area? Do properties in the area sell rather quickly?
Other considerations should be whether the appraisal value is low compared to its ARV. Most hard money lenders tend to use aggressively lower values as the basis for the hard money loan. Your estimate of the home’s value should be conservative.
Liquid assets may be a factor for certain hard money lenders. Do you have a partner(s) or guaranteed lines of credit?
You may also obtain additional sources for hard money lenders online. Simply do a search for hard money lender list and it will pull up more lenders than you can research. For your convenience, however, here are several sites you might want to consider:
Reiclub.com/hard-money-lenders.php
Kennedyfunding.com
Metrofundingcorp.com
Mountainfunding.com
Aventinefunding.com
Preconstructionprograms.com/hard-money-loan.php
Hardmoney.com
Coppercrestfunding.com
Loansforcaliforniahomes.com
realestateradiousa.com/freedocuments/hardmoneydirectory.pdf
mergernetwork.com/resources/main/catID/33
Hardmoneyfunding.com
Artmam.net/Hard_Money_Lender.htm
Capitalfunders.com/HardMoneyLoan.htm
Rehabhardmoney.com/