Some rotten apples have tarnished the hard money lending industry in recent years. A handful of predatory lenders attempted “loan to own” schemes, giving out very risky loans to borrowers using real estate as security with the intention of foreclosing the properties.
The good news is these types of lenders are non-existent in today’s market. Although some of the stigmas remain with some real estate investors who have not experienced the services of a reputable hard money provider.
Hard money loans are short-term loans with real estate as security. This way of real estate finance is funded by private fund investors versus the traditional lenders like banks or credit unions.
The payment terms are around 12 months, but it can be extended between 2 to 5 years. It requires monthly payments of interest only or interest and some principal with a balloon payment at the end of the loan period.
Hard money lenders compute the amount of the loan based on the value of the property being offered as security.
The property may be owned by the borrower or is in the process of being acquired.
Hard money lenders are more focused on the value of the property being used as collateral rather than the borrower’s credit.
Borrowers who can’t get traditional financing due to foreclosure can still get a hard money loan if they have enough equity in the property that is offered as security.
The banks may say “No,” but the hard money lenders can still say “Yes” to your loan application.
You can obtain a hard money loan using any type of property whether single family residential, multi-family residential, land, commercial and industrial.
There are hard money lenders who focus on one type of property and don’t offer loans on other types simply because they don’t have the experience in this area.
Majority of hard money lenders operate in a specific niche where they are most comfortable in. You can ask them at the onset which type of loans are they willing to offer.
Most lenders will not lend to owner-occupied residential properties due to rules and regulations but there are some who are ok to do the added paperwork with the borrower.
Hard money loans are not ideal for all situations. When buying a primary residence with good credit, income history and no issues like foreclosure, bank financing is the best way to go.
Hard money loans are your source of financing when banks are not an option, or the funds are needed quickly. They are also ideal in these instances:
- Land Loans
- Fix and Flips
- Construction Loans
- If the buyer has credit issues
- If a real estate investor needs the funds quickly
Real estate investors opt for hard money because they can obtain the funds quickly versus traditional channels. In most cases, hard money loans can be funded in a week.
Bank loans usually take from 30 to 45 days to get funded. The application process for hard money loans take 1 to 2 days, and the loan can be approved on the same day.
The ability to get funds at a much faster rate than a bank loan is an advantage for a real estate investor. There are times when an investor is trying to buy a prime property with many competing bids. A quick closing offer using a hard money loan will get a seller’s attention and set an investor’s offer apart from the rest offering slow traditional financing.
Another major reason for investors to choose hard money financing is being rejected by banks on their conventional loan application.
This may occur due to short sales, foreclosures or credit issues which are sometimes unavoidable.
Banks also look at income history, they may deny an application due to lack of income history even if the borrower makes a good income.
Hard money lenders can look beyond these issues as long as the loan can be repaid and the borrower has equity in the property being offered as collateral.
Interest rates being charged by hard money lenders will vary between lenders. Hard money lenders in California have lower rates than other parts of the country since the competition there is stiff.
Hard money lenders take on more risk compared to traditional bank loans. Due to the higher risk, you can expect interest rates to be higher than bank loans. The range of interest rates may be from 10% to 15%.