A hard money loan is simply a short-term loan secured by real estate. They are funded by private investors (or a fund of investors) as opposed to conventional lenders such as banks or credit unions. The terms are usually around 12 months, but the loan term can be extended to longer terms of 2-5 years. The loan requires monthly payments of only interest or interest and some principal with a balloon payment at the end of the term.
The amount the hard money lenders are able to lend to the borrower is primarily based on the value of the subject property. The property may be one the borrower already owns and wishes to use as collateral or it may be the property the borrower is acquiring.
Hard money lenders are primarily concerned with the property’s value rather than the borrower’s credit (although credit is still of some importance to the lender). Borrowers who cannot get conventional financing due to a recent foreclosure or short sale can still obtain a hard money loan if they have sufficient equity in the property that is being used as collateral. When the banks say “No”, the hard money lenders can still say “Yes”.
Property Types for Hard Money Loans
A borrower can get a hard money loan on almost any type of property – including single-family residential, multi-family residential, commercial, land, and industrial.
Some hard money lenders may specialize in one specific property type such as residential and not be able to do land loans, simply because they have no experience in this area. Most hard money lenders have a specific niche of loan they are most comfortable with. Ask them upfront which type of loans they are willing and able to do.
Many hard money lenders will not lend on owner-occupied residential properties due to the extra rules and regulations (thanks Dodd-Frank!) but there are those who are willing to wade through the paperwork with the borrower. All hard money lenders will do loans in 1st position, while fewer will do 2nd position due to the increased risk for the lender.
What Types of Deals Should Hard Money Loans Be Used For?
Hard money loans are not appropriate for all deals. When purchasing a primary residence with good credit, income history, and there are no issues such as a short sale or foreclosure, conventional financing through a bank is the best way to go if the borrower still has time to go through the lengthy approval process required by a bank. Hard money is your source of financing when banks are not an option or the loan is needed in a short period of time.
Hard money loans are ideal for situations such as:
- Fix and Flips
- Land Loans
- Construction Loans
- When the Buyer has credit issues.
- When a real estate investor needs to act quickly.
Who Should Use a Hard Money Loan?
Real estate investors choose to use hard money for many different reasons. The main reason is the ability of the hard money lender to fund the loan quickly. In most situations, hard money loans can be funded within a week. Compare that to the 30 – 45 days it takes to get a bank loan funded. The application process for a hard money loan generally takes a day or two and in some cases, a loan can be approved the same day. Good luck hearing back about a loan approval from your bank within the same week!
The ability to obtain funding at a much faster rate than a bank loan is a significant advantage for a real estate investor. Especially when the real estate investor is trying to acquire a property with many competing bids, a quick close with a hard money loan will get a seller’s attention and set their offer apart from the rest of the buyers offering slow conventional financing.
Another reason a borrower may choose to use a hard money loan is that they have been rejected by the banks for a conventional loan. Life doesn’t always go as planned. Short sales, foreclosures, credit issues… they happen. Another important thing banks need to see is income history. If a potential borrower recently started a new job, the bank may deny the loan request due to insufficient income history, even if the borrower makes a healthy income. Hard money lenders are able to look past these issues as long the loan be repaid and the borrower has enough equity invested in the property.
Borrower Requirements for Hard Money Loans
As discussed earlier, hard money lenders are primarily concerned with the amount of equity the borrower has invested in the property that will be used as collateral. They are less concerned with the borrower’s credit rating. Issues on a borrower’s record such as a foreclosure or short sale can be overlooked if the borrower has the capital to pay the interest on the loan.
The hard money lender must also consider the borrower’s plan for the property. The borrower must present a reasonable plan that shows how they intend to ultimately pay off the loan. Usually, this is improving the property and selling it or obtaining long-term financing later on.
Everything You Need to Know About Fix and Flip Loans
Many individuals are beginning to realize the potential profit that can come from fixing and flipping homes, but money tends to be the number one obstacle. Before you can complete renovations on a home and sell it for profit, you need capital to purchase it. The costs associated with fixing and flipping houses can add up quickly and include repairs, contractor fees, listing and broker fees, among many others. Let’s examine key points you need to know about fix and flip loans.
Why Choose Fix and Flip Loans?
When you choose to take on the endeavor of purchasing, renovating, and selling a home, you most likely will need access to additional funds. This money is generally not secured through traditional lenders such as banks. Fix and Flip loans are approved fast with some companies responding within the same day of application. Furthermore, funds are often accessible within days depending on the company. This makes for a smooth process when placing an offer on a potential flip.
What Properties Can Be Funded Using Fix and Flip Loans?
One of the greatest advantages of Fix and Flip loans is their versatility. For example, properties ranging from multi-family residences, single family units, commercial buildings, and other types of property that do not fall under the typical residential and commercial categories can be covered. This provides nearly unlimited access to the profit you can make and gives you access to far more properties than you may have initially contemplated.
What Are the Common Fix and Flip Loan Conditions?
Fix and Flip loans generally range from anywhere between $30,000 and $1 million plus. While payment periods typically fall between six and twelve months, there are numerous lenders who provide long term loans to borrowers, which can be especially useful in the case of a major renovation or repair. Most lenders will give loans up to 75% of the current property value, have no appraisal fee, and contain varying interest rates depending on the loan provider.
What Do Lenders Consider in Fix and Flip Loans?
There are a number of considerations that lenders may examine when determining whether or not you are a candidate for a Fix and Flip loan. This includes the experience the applicant has regarding these projects, the amount of capital available, the purchase price of the property, the estimated value of the property after repair, and the potential cost of renovation. Usually, lenders will base the loan on the current property value in order to reduce risk associated with renovation.
What are Common Mistakes Made in Fix and Flip Lending?
One of the biggest downsides of flipping a home is the potential to make mistakes when taking on loans. Often, applicants overestimate the post-renovation value or do not have a contingency fund to cover unforeseen repairs. Additionally, flippers may add premium features to a home that are not fit for the neighborhood which deter buyers from paying the additional premium. Working with inexperienced contractors and underestimating the time to complete the project are two other common mistakes made in Fix and Flip lending.
While numerous television shows make flipping homes look easy, entailing buying, fixing, and selling for a major profit in a few weeks, it is a lot harder than it appears. Weigh the pros and cons and examine four key factors including finding a house at a low enough price, obtaining a reliable contractor, securing a Fix and Flip loan, and selling at a price that will not only cover the expenses, but will provide enough profit to compensate for the time invested.