A hard money loan is a type of quick financing secured by a property. Real estate investors have long used hard money loans to finance their real estate investments for reasons of speed and flexibility. But for those who have never taken out a non-traditional loan before, here are 10 important things they should know about hard money loans:
1. Process for Hard Money Loans:
Hard Money Loans provide Investors access to capital to purchase investment properties. The application for a hard money loan is very simple. Hard money lenders typically take one to two days and may even be approved the same day. Hard Money is available for adequately collateralized loans on single-family residential houses and other Real Property including commercial projects. The simplicity and straightforwardness of a hard money loan has made it a popular choice for real estate investors and house flippers.
2. Interest Rate:
The interest rate for hard money loans varies from lender to lender. Usually interest rate ranges from 10% to 18% interest only annual interest rate payable monthly in most cases. Some Lenders will defer interest payments to payoff, benefiting investors that do not want payments during rehab.
3. Loan-to-Value (LTV):
Hard money loans are backed by the value of the property, not by the credit worthiness of the borrower. With a hard money loan, a borrower can borrow 65-75% of the property value. With most hard money lenders, the loan to value is determined through either an appraisal or a broker opinion of value.
4. Loan Terms:
A hard money loan is simply a short-term loan secured by real estate. The loan terms are usually around 12 months depending on the Lender and your needs, but the loan term can be extended to longer terms of 2-5 years. Longer the term can lead to increased costs or interest rate.
5. Loan Costs:
The costs will vary based on the loan amount. All loans will require title policy, insurance, and appraisal. These services come with fees that can range from a few hundred to a couple of thousand dollars. Most require origination points ranging from 2 to 10 points.
6. Credit Scores:
Credit Scores are considered but lenders set their own criteria for “acceptable credit” and will be more receptive to “common sense” credit review. Private Money Lenders look more at the situation and the cause of the credit flaws and rely on the collateral and higher points and rate to mitigate risk.
7. Hard Money Loans for Repairs:
Yes, hard money loans can opt for repairs also. Most hard money lenders require a draw request form to be filled out to identify the completed repairs to the property, copies of the invoices from the contractors or sub-contractors. After work is inspected, draws can be dispersed. Typically work is not paid in advanced.
8. Down Payments:
In most cases, you need to put money down. Lenders want to ensure that you have enough resources to finish the repairs and cover the costs of the loan plus any surprises. Therefore, most hard money lenders require that origination/discount points and other required items be paid at or before closing. They are confident that if you cannot afford to close you typically cannot afford to take out this type of loan.
9. Prepayment Penalties:
Traditional financial institutions often charge hefty prepayment penalties if circumstances change and a loan is fully or partially repaid before the due date, but private hard money lenders are fully invested in your success and typically structure loans without prepayment penalties or added fees.
10. Loan Flexibility:
Hard money lenders are flexible can structure repayment and collateral release terms in ways that are mutually beneficial to both borrower and lender. They always believe greater flexibility often results in better outcomes.
The Bottom Line:
If you need fast access to capital for real estate investments then hard money loans are great option for you. Hard money loans can be obtained faster and easier than a conventional loan and while in almost all cases the amount you can borrow from a private lender exceeds the amount you can qualify for from a convention lender the cost difference is minimal.
Magna Capital Group, Inc. is one of the leading hard money lenders in California. Through our global network of relationships, we identify and implement a wide range of real estate and financial transactions. We have extensive experience in placing conventional & private money financing on residential and commercial properties of all types. If you are considering for a hard money loan, please feel free to contact us today at (310) 734 4044 or Email at firstname.lastname@example.org.