What is a hard money loan and why would you use one?
Hard Money Loans are typically funded by private investors or companies for a purchase of an Investment or Non-Owner Occupied Home. Hard Money and Private Money loans are utilized by Real Estate Investors to Purchase and Rehab an Investment Property. Once the property is rehabbed and Sold the Hard Money Loan is paid back by the Investor.
What are some facts about Hard Money Loans?
A Hard Money Loan is secured by Real Estate and is usually a shorter term loan with a higher interest rate. Hard Money Loans are used by Real Estate Investors when they need money quickly to purchase and rehab a property.
There are two types of Hard Money Lenders Private Investors and Companies.
A private investor is usually a individual who has money to lend personally. These investors are harder to find, but have money to lend and would prefer to earn big returns on their money with Interest Income secured by Real Estate. These loans are shorter term loans and the quicker you get a project done and payback the Private Investor the faster you can start another project.
Company Lenders. There are also Hard Money Loan Companies who Investment Property Loans. They usually will have a set of Underwriting Guidelines that are used to base their lending decisions. These companies can be a group of individuals making loans or even an Investment Fund lending money for Investment Properties. These lenders will have an application process and some basic requirements to get started.
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Private Lenders and Hard Money Lenders are a great resource to provide financing for Fix and Flip projects. Each Hard Money Lender will have their own guidelines on the amount of the loan they will fund, the interest rate and the term of the loan. In most cases these loans are made based on the Loan to Value of the property, and how much money the investor is putting down on the purchase price. In some cases you may be able to find a hard money or private lender that will not require a down payment, but for first time investors, most will have some down payment requirement.
Hard Money Loans are loans made at higher interest rates because of the short term nature of the loan and the risk associated with funding a project that needs repairs. In most cases you can expect to pay higher interest rate on a Hard Money Loan. The loan term is usually 12, 24, or 36 months depending on the lender. Private and Hard Money Lenders will base the loan amount on the Value of the Property. The higher the loan to value the higher your interest rate will be. The lower the loan to value and the lower risk to the lender then you will typically receive better loan terms.
Some things to look out for?
Scams on Social Media. If a someone is advertising low single digit interest rates and 100% financing it is too good to be true. Hard Money Loan interest rates are going to be double in some cases of what a Traditional Loan Mortgage Rate would be on a Owner Occupied Private Residence.
Lenders will also need to protect their interests in the property so getting a 100% financing is not going to happen for an investment property.
Upfront Fees never pay an application fee just to apply for a loan. If there is an upfront application or loan fee this is not a real offer. Any fees associated with the Hard Money loan will be charged on the Loan at closing and funding of the loan.
Let us know what your experience has been with private and hard money financing.
Hippotecca Staff
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