It's easy to forget that not everyone is familiar with hard money loans and lenders. This seemingly mysterious industry and practice turns out to be new to a majority of the borrowers that use our site to find a lender. While we have discussed many details in previous articles, we thought it was a good idea to go back to basics and simply explain what a hard money loan is.
Money is critical to your survival. One of the greatest assets it can get you is a home. Since you might need hundreds of thousands or a million dollars, it makes sense to partner with a lender who can provide quick cash. Well, unless you are the richest guy in the world.
Truth be told, you cannot qualify for a bank loan every time you need money. To overcome this challenge, why not turn to a hard money lender? Hard money allows you to finance a home purchase or an investment property in the shortest time possible and usually with the least amount of requirements.
What exactly are hard money loans?
Hard money loans are a short-term financing option that gives you quick money which is secured by real property; or another asset of significant value. Do you understand all the mechanics of hard money lending? Perhaps you’ve had a negative perception about it in the past. Once you grasp the concept, it might be the first option you want to consider to finance things really quickly.
These loans are not only easier to qualify for but are almost always available significantly faster than traditional bank loans because they are secured by collateral worth at or above the loan amount. For instance, you have a paid off house worth $400K and you want $275K to purchase an investment property. Using your primary residence as collateral would allow you to take out a hard money loan quickly and easily.
How about interest rates and points?
Hard money lenders charge two things: interest rates and points. These charges differ according to the geographical location, the lenders themselves and the details of the deal. For instance, a hard money lender in Texas may charge a higher interest rate than another in New Jersey. In some places, the competition is very stiff hence the interest rates are reduced to lure more customers into borrowing hard money.
Because hard money lenders assume greater risks than traditional financial institutions, they charge clients higher interest rates ranging from 6% to 18%. The points can be anything between 2% and 6% of the loan amount. Also, the points and interest rate depend on the Loan to Value ratio. It's worth knowing that the more risky a loan is for a lender, the higher these fees will be.
What is the Loan to Value Ratio (LTV)?
A hard money lender is guided by LTV when providing a particular loan amount. The LTV is basically the total amount of loan relative to the collateral value. Most lenders settle for an LTV between 65% and 85% of the current property but this can go as high as 100% LTV.
Other lenders, specially for financing flip or rehab investments, base their offers on the After Repair Value (ARV). This is the potential value of a property after major improvements have been made e.g. remodeling. In a case where the property needs repair, the loan becomes riskier due to the additional capital the lender has to put in. Also, the borrower’s capital decreases hence a higher interest rate is charged.
Some hard money lenders offer a higher ARV percentage and refinance the total costs. While these terms sound great, they come with higher points (5%-6%) and interest rates (15%-18%) especially when the borrower makes no down payment.
As explained above, collateral is the most significant consideration in hard money lending. If you are considering an investment property, your lender will give you an amount that is worth your property value. Should you have a foreclosure or another negative element on your credit, it matters not.
But most hard money lenders take an interest in the borrowers personal finance. The reason the lender keeps the LTV ratio low is that they know they can quickly sell the collateral and recover their full amount in case you default.
The underwriting process
There is no standardized underwriting process with hard money lending. Instead, the lenders evaluate deals individually. Depending on the unique situation, they can tweak terms and repayment schedules. Remember that you are borrowing from someone who can accept negotiations as opposed to a big institution with strict procedures.;
How to find a good hard money lender
Finding not only a good hard money lender but one who lends within your parameters used to be quite difficult until we created Hard Money Offers. While a quick Google search may turn up a handful of lenders, odds are you are not a fit for them. You could spend an entire week searching for lenders and reading through their websites trying to determine which are right for you. Or, you could use our platform to do all of that work for you.
It works by submitting a quick funding request which only takes 1-2 minutes. Using the information that you provide, our system automatically matches you with the nearly 1,000 hard money lenders that we work with. Those lenders get notified immediately, and any interested lender will connect directly to you through our site. You could receive multiple offers the same day and easily compare which lender is the best for you to work with.