Hard Money Loans: Financing House Flipping - Lendinghome

Published Nov 23, 21
4 min read

What The F**k Are Hard Money Lenders?

What Is a Hard Money Loan? I hear this question all the time. A hard money loan is a loan based on “hard” assets, like real estate. The loans offered by hard money lenders are designed to be short-term loans, usually extending for around 6-12 months. (Depending on the lender, some borrowers might be able to extend for longer terms.) The actual loan amount offered by a hard money lender is secured by real property.

Most hard money lenders calculate the amount you can borrow based on either the “as is value” of your property or the “After Repair Value” (ARV). You could borrow up to 80 percent of the ARV in at least one case. A loan based on the ARV can include the repair costs along with the purchase price.

There are many property types lenders are able to finance: single- and multi-family ; ; vacant land; or industrial property. However, the majority of hard money lenders don’t lend on owner-occupied residential homes. How a Hard Money Loan Differs from Traditional Loans Hard money loans can come in many different shapes and sizes, so the differences between hard money loans and traditional loans can be significant.

What Are Hard Money Loans And How Do They Work?

With a traditional loan, the repayments are calculated using amortization. Each repayment contains a portion that covers the interest due and a portion which pays down the loan principal a little more each time. Payments on hard money loans are interest-only payments. Then, at the end of the loan term, the borrower pays the principal owed in a lump sum.

In comparison, hard money loans are usually issued by hard money lenders or private investors. Mortgage originators and banks must adhere to strict regulations. These can inhibit lending for real estate investment deals (even great ones). Hard money lenders, on the other hand, aren’t constrained by those same regulations, and can make decisions based on good business sense.

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This makes sense for investors who need to act quickly in a short period of time. In most situations, a hard money loan can be funded in as little as 7-10 days, sometimes less. With hard money loans, less-than-perfect credit might be offset by other factors such as the property’s location, total value and available cash assets.

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These factors should all be taken into consideration. Actual Cost Associated With Hard Money Loans Now we’re getting down to the juicy facts! Avoid the most common mistakes calculating the actual cost associated with hard money loans. This requires some expertise. Many people focus solely on the interest rate charged on the loan.

Here are some of the costs that may be associated with your loan: Interest rates on hard money are higher than traditional loans, but the loan term is much shorter. It’s wise to consider the actual dollars that will be paid during the term of the loan, rather than the APR.

Points are calculated as a percentage of the loan amount. This is the charge for originating the loan. With most lenders, points can vary between 2-4 percent of the total loan amount. The actual points charged on your loan may depend heavily on the loan-to-value (LTV) ratio of your deal, the interest rate charged and the risk associated with the loan.

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Again, this is known as the “After Repair Value.” No matter what your reasons are for using a hard money loan, the lender you choose will also want to know your exit strategy (in other words, your plan for how you’ll repay the money you borrow). Since this type of loan would be short-term, the buyer has plenty of options following repairs.

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This second strategy is a favorite among landlords. Conclusion for Property Investors Searching for a Hard Money Lender There are plenty of different hard money lenders available, so be sure you find a reputable company. Most mortgage brokers and REALTORS® and even traditional banks have connections with experienced hard money lenders and can usually recommend one.

Hard money is similar to a bridge loan, which usually has similar criteria for lending as well as costs to the borrowers. The primary difference is that a bridge loan often refers to a commercial property or investment property that may be in transition and does not yet qualify for traditional financing, whereas hard money often refers to not only an asset-based loan with a high interest rate, but possibly a distressed financial situation, such as arrears on the existing mortgage, or where bankruptcy and foreclosure proceedings are occurring.