Hard money loan questions

So excited to hear what everyone has to say!

I figured there would be someone that knew a little bit about this.

Usually with hard money they will lend about 60%-70% of after repair value. I have not seen one at 85%-90%. Interest rates are around 12%-18% with 3-8 points as well (points are an additional percentage you will have to pay). Hard money lenders say they don't care about credit but they generally will pull it, which may cause you to pay higher points or interest rates if you have a low score. A lot of hard money lenders are asking for down payments as well. Asking for experience is not uncomman either, with out experience you may be paying higher rates.
This site is pretty typical for hard money, so take a look at the hard money option.
http://www.tempofunding.com/hard-money-loans/

Hope this helps.

Thank you Eroberts for explaining that. It has been bugging me. That means points would be the 4-6% loan fees or flat fee = 4-6 points? So on an example as per the site I found above using 100,000 ARV the HML I would get up to 70%. Let say I got 70,000, I would need to buy the house at 58% of ARV if it needed 12,000 in repairs less for fudge room so like 52-55%. I would have to pay 20% down plus 4-6,000 at closing including my normal closing costs out of pocket plus a 12-18% rate or 3,295 - 3,495 monthly payments with a 2 year term if I plugged in the numbers correctly.

The one you showed me has a 90 day term, but not sure how to work that into a calculator as the mortgage rate comparison calculator only does year terms ^_^ any help there would be sweet. I mean is it the same monthly amount or does it change if I put in one year for the term vs 3 months? So confused on how to get a per month cost of a loan for say like example above for 70,000.

I have to say that looks rough with a HML from the one I was going to us and yours looks better I need to check them out some more. Also once the repair work is finished if I understand this correctly I can refinanced for 90% of its new value with a conventional loan without seasoning issues (so no FHA loans or subprime) to cover my HML putting it under better monthly terms say at 4-8% (334-514 vs the 3,295 - 3,495 a month) under 30 year loan I can then let it sit for another 3-4 months without sweating the cost of the monthly payments while it is either listed on MLS or sell it via my own marketing.
**Did I understand that right to make a good solid profit?
**Do I need a down payment, credit, etc for refinancing or can I use the house to secure the loan like in the HML?

Sure and thanks for posting! PM it to me if they don't. I would like to look at all my options as I am still considering a few different companies.

Hi JCommons - you had quite a few questions in that last big post, so let me add some light to the main topics:

- Points = 1% of the loan amount, typically paid at closing and withdrawn from your available loan proceeds paid to you (check with your HML, everyone is slightly different). So 4 - 6 points on $70k = $2800 to $4200 due at closing. Again, sometimes paid as cash, sometimes deducted from the loan proceeds.

- Closing Costs = appraisal, inspection, title search, attorney fees, prepaid items like insurance and taxes = up to $3,000.

- Interest payments: most HML's have straight monthly int. So 12% on a $70k loan (1% per month) = $700 /mo.

- Reserves: most will require 6 months reserves for the interest payments PLUS a set amount to cover cost overruns. They want to make sure you have the funds to finish the job - very important!!

- Refinancing: I would look to sell personally than refinance. But on an investment property 70% LTV and 6-12 months seasoning are standard. I say investment property b/c most HML's won't lend on an owner occupied house. You'll definitely need good credit for the refinancing.

Hope that helps,

- Tom

Wow thank you TDSPropertiesVT I think you caught just about everything! Lol but now I have more questions after what you said! ><.

HML's are for rehabs correct and what I mean is a conventional lenders wont give you a loan if the house is in need of repairs. So investors get hard money loans. I believe that is how it works.

**But they will only cover 60-70% purchase of the house NOT help cover the rehab cost?

Example: 160,000 house I purchase for 100,000 and needs 12,000 in rehab work. The hard money loan will only give me a 60-70,000 loan for this investment.

**Did I understand that correctly?

**Where do you find the funds to do the 12,000 rehab work?

**I have had some tell me private lenders but isn't that what hard money lenders are?

I just read/found out there are two types of hard money loans: hard money loans based on appraised value and hard money loans based on purchase price

**I think the one in my example is the one based on purchase price?

**So that would mean if I got one based on appraised value (need to check if that is current or ARV) would cover the purchase and most if not all of the rehab work?

Hi JCommons,

Yes, there are HML's that lend on purchase price and ones that lends on ARV. ARV is much tougher these days simply because there's more risk. There's a risk you won't finish the job properly and if the lender has to foreclose, they're taking back a property that may not be marketable. So in short, you can find HML's that lend rehab funds based on ARV, but it's getting tougher. As stated in many posts, HML's are local so do your research for your particular area.

Another source (my preference) is small local banks that hold their loans in house (don't resell them). As such, they have more flexibility in downpayment, credit score, etc. Develop a relationship with someone in the commercial loan department. They can typically lend purchase + rehab funds on a draw schedule. Their rates are much better too.

- Tom

Hey guys, great thread. I just learned a boat load just now.

I don't have large amounts of cash and this will surely help.

Thank you all.

JCommons--good question since there are no bad ones, just ones that have never been mentioned.

Peace.

Check out this link to another thread that should answer most information:

http://www.deangraziosi.com/node/10104

There are a lot of misconceptions about hard money lenders: what they are, what they aren’t, how much they cost, and when you should use them. Hard money lenders are neither thieving opportunists nor last-minute saviors, but they are a resource that can sometimes be the right fit for a real estate deal.

What is a hard money loan?

Hard money, or private money, is exactly that: non-institutional money that can be borrowed, usually from an individual or an extremely small lending company. They are an alternative to a bank or traditional mortgage lender, and their loans are typically much different.

Hard money lenders are expensive. They typically charge interest rates in the teens, and charge at least 2-3 points and sometimes as many as 7-8. Clearly, this is not a loan for Joe Homeowner.
They typically lend for very short terms. This could be anywhere from a few months to a few years, but seldom longer.
They lend at extremely low loan-to-value ratios (LTVs), meaning that they will only lend a small fraction of the value of a property. If the real estate appraises for $100,000, they might only lend $60,000.

Advantages of hard money loans

With all of that being the case, why would anyone use them? There are several advantages, offsetting all of those disadvantages. To begin with, they are much faster to act than the average bank, often able to close a loan in less than a week. This makes them a good choice for distress sales and other scenarios where an investor has an opportunity to buy low but only within a short window of time. Second, they are collateral-based lenders, focusing first and foremost on the equity position of their lien, and scrutinizing the borrowers themselves far less heavily. That means that they will lend to borrowers with bad credit, borrowers who can’t document income and other difficult borrowers because they are only lending such a small fraction of the value of the real estate.

When to use a hard money lender

So when is it a good idea to use a hard money lender? As a general rule, homeowners should not borrow from hard money lenders, as the loans are expensive and temporary. Seasoned real estate investors, however, who know the game well, may decide that it is worth the expense in order to quickly buy a house for a bargain. If banks won’t lend to them due to credit or income, investors may not have a choice but to use a hard money lender to invest in real estate. Hard money loans are also particularly well-suited to renovation and construction loans because hard money lenders tend to be so much more responsive and flexible. Landlords who buy shells, renovate them and then rent them out must be prepared to refinance as soon as the renovation or construction is finished, however, because the interest rates are so high.

Hard money lenders can be a useful resource for the wise real estate investor, but all investors should take a good look at their local banks first, as some local banks can offer the same speed, flexibility and quality of service as a hard money lender at a fraction of the price. Real estate investors are wise to try to establish a relationship with both a local bank and a local hard money lender to keep their options open and to find the best fit for each real estate deal that they make.

Randy Bailiff
Dean Graziosi Real Estate Investment and Life Coach

Using hard money is a great source to put deals together but it costs a lot. once you get a few deals under your belt going out and searching for private money is a must. You won't pay nearly as much and you can borrower their money more freely.

Usually what I do is talk about real estate and the successful deals I've done around people I influence. They then talk about it with their friends and family. I get referrals often of people that want to put their money into real estate.

I can then use their money to purchase the deals as well as rehab them.

Having money makes the deals much easier

Mikessler
Keep Moving Forward!

A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by the value of a parcel of real estate. Hard money loans are typically issued by private investors or companies. Interest rates are typically higher than conventional commercial or residential property loans because of the higher risk taken by the lender. Most hard money loans are used for projects lasting from a few months to a few years. Hard money is similar to a bridge loan, which usually has similar criteria for lending as well as cost 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.

The qualifying criteria for a hard money loan varies widely by lender and loan purpose. Credit scores, income and other conventional lending criteria may be analyzed. However, most hard money lenders primarily qualify a loan amount based on the value of the real estate being collateralized. Typically, the biggest loan one can expect would be between 65% and 70% of the property value. That is, if the property is worth $100,000, the lender would advance $65,000 - $70,000 against it. This low LTV (loan to value) provides added security for the lender, in case the borrower does not pay and they have to foreclose on the property.

Randy Bailiff
Dean Graziosi Investment and Life Coach

A hard money loan is a species of real estate loan collateralized against the quick-sale value of the property for which the loan is made. Most lenders fund in the first lien position, meaning that in the event of a default, they are the first creditor to receive remuneration. Occasionally, a lender will subordinate to another first lien position loan; this loan is known as a mezzanine loan, a second lien or a junior lien.

Hard money lenders structure loans based on a percentage of the quick-sale value of the subject property. This is called the loan-to-value or LTV ratio and typically hovers between 60 and 70% of the market value of the property. For the purpose of determining an LTV, the word "value" is defined as "today's purchase price." This is the amount a lender could reasonably expect to realize from the sale of the property in the event that the loan defaults and the property must be sold in a one- to four-month time-frame. This value differs from a market value appraisal, which assumes an arms-length transaction in which neither buyer nor seller is acting under duress.

Below is an example of how a commercial real estate purchase might be structured by a hard money lender:

65% Hard money (Conforming loan)
20% Borrower equity (cash or additional collateralized real estate)
15% Seller carry-back loan or other subordinated (mezzanine) loan.

Randy Bailiff
Dean Graziosi Investment and Life Coach

Commercial hard money lender and bridge lender programs are similar to traditional hard money in terms of loan to value requirements and interest rates. A commercial hard money or bridge lender will usually be a strong financial institution that has large deposit reserves and the ability to make a discretionary decision on a non-conforming loan. These borrowers are usually not conforming to the standard Fannie Mae, Freddie Mac or other residential conforming credit guidelines. Since it is a commercial property, they usually do not conform to a standard commercial loan guideline either. The property and or borrowers may be in financial distress, or a commercial property may simply not be complete during construction, have its building permits in place, or simply be in good or marketable conditions for any number of reasons.

Some private investment groups or bridge capital groups will require joint venture or sale-lease back requirements to the riskiest transactions that have a high likelihood of default. Private Investment groups may temporarily offer bridge or hard money, allowing the property owner to buy back the property within only a certain time period. If the property is not bought back by purchase or sold within the time period the commercial hard money lender may keep the property at the agreed to price.

Traditional commercial hard money loan programs are very high risk and have a higher than average default rate. If the property owner defaults on the commercial hard money loan, they may lose the property to foreclosure. If they have exhausted bankruptcy previously, they may not be able to gain assistance through bankruptcy protection. The property owner may have to sell the property in order to satisfy the lien from the commercial hard money lender, and to protect the remaining equity on the property.

Randy Bailiff
Dean Graziosi Investment and Life Coach

The rate is not dependent on the Bank Rate. It is instead more dependent on the real estate market and availability of hard money credit. As of 2008 and for the past decade hard money has ranged from the mid 12%–21% range . When a borrower defaults they may be charged a higher "Default Rate". That rate can be as high as allowed by law, which may go up to or around 25%–29%. Some private lenders will collect a prepayment penalty and some will not.
Hard money points

Points on a hard money loan are traditionally 1 to 3 more than a traditional loan, which would amount to 3 to 6 points on the average hard loan. It is very common for a commercial hard money loan to be upwards of four points and as high as 10 points. The reason a borrower would pay that rate is to avoid imminent foreclosure or a "quick sale" of the property. That could amount to as much as a 30% or more discount as is common on short sales. By taking a short term bridge or hard money loan, the borrower often saves equity and extends his time to get his affairs in order to better manage the property.

All hard money borrowers are advised to use a professional real estate attorney to assure the property is not given away by way of a late payment or other default without benefit of traditional procedures that would require a court judgment.

Randy Bailiff
Dean Graziosi Investment and Life Coach

On hard money loans and have learned a lot from reading this post also. So far I have not come across anything then that would be interesting enough to consider a hard money loan, as for bank loan is questionable too even with my credit rating since I want to keep it where it is right not.

Shawn

On hard money loans and have learned a lot from reading this post also. So far I have not come across anything then that would be interesting enough to consider a hard money loan, as for bank loan is questionable too even with my credit rating since I want to keep it where it is right now.

Shawn

Great question JCommons and thank you for the thorough replies and information on hard money loans and the differences between the conventional, traditional, transactional and so forth. It is beginning to make better sense to me now. Now, one question: What would be the type of loan most recommended for a first time investor with no money and very poor credit? This question may already have been answered, but would you directly state the response again? I'd appreciate it.