Hard Money Lenders
So What Exactly Does “Hard Money” Mean?
Investors typically consider money to be in one of two different types. Hard or soft. Usually, soft money means that the terms are somewhat more flexible and also easier to qualify for. Think consumer debt. Whereas, hard money typically has more strict terms and conditions involved. Hard money is also referred to as “private money” as it usually comes from high net worth individuals and is used for investment purposes.
Obviously with any type of lender, their first priority is to protect their money. While the specific terms vary from one hard money lender to the next, they are all in it for something. Meaning that they are looking to make a profit by loaning their hard earned money out to you. Hard money lenders lend based upon the specific deal that is presented to them. For example, you find a terrific investment opportunity but need some cash in order to acquire, fix and flip. That’s where a hard money lender comes into play. You just need the money for a short period of time, but don’t have the means to fund the deal yourself.
How does it work?
The hard money lender will loan you the money after they qualify you and make sure that you have enough equity to cover the loan should you default on payments (or that the property has enough equity in it for the hard money lender to take over should you default). The norm for hard money lenders is to loan up to 70%-80% ARV (or After Repaired Value) although a long-term relationship with a lender or the specifics of the deal can alter this percentage. Interest rates from hard money lenders are higher than normal fixed interest rates that you would see at a regular financial institution. Usually the properties being purchased by investors are in need or major repairs or do not qualify for traditional financing for one reason or another. Thus, the higher the risk, the higher the interest rate by the lender. These rates can vary greatly, but on average are anywhere between 9% to 20% annually with maturies ranging from only a few months to a short number of years. Rates will vary based upon the individual hard money lender. But, also based upon the borrower’s experience, credit score and assets. In addition, one should expect to pay points when utilizing a hard money lender. Each point is equal to one percent of the initial mortgage balance and points range on average between 2 to 10 points. So if your loan is $100,000 and the hard money lender is charging 2.5 points, then that would be $2,500 in fees due to the hard money lender.
A nice aspect of hard money lending is funds can be quickly available and that is a great advantage when you need to act fast to secure a property (frequently the lender can fund within 14 days after the buyer goes under contract). And, a hard money lender doesn’t always require a down payment meaning the borrower may need little actual cash to close depending upon the loan size as compared to the ARV. A few things that you need to be aware of with hard money lenders is that there may be a pre-payment penalty involved and not all hard money lenders are legit. So, do your homework and ask other investors for referrals!
As with any lending institution (whether it’s a bank or an individual hard money lender), you may be asked to supply the normal paperwork that goes along with obtaining a loan. This includes your tax returns, bank statements and recent pay stubs.
Some hard money lenders will be interested in learning more about the physical condition of the property while others may just look at the numbers on paper to ensure that it is a good investment opportunity for them. A hard money lender can be a creative way to financing a property and you may be able to obtain financing that you may not otherwise be able to.
Who uses hard money lenders?
Beginning investors, homeowners in danger of losing their home or if a home was bought before the other home was sold are all typical scenarios for the use of hard money. A hard money lender is usually an average Joe loaning his/her own money from a pension plan or other investment portfolio to receive a higher yield.
How do I find a hard money lender?
While there may not be a sign on every street corner advertising the fact that someone is a hard money lender, they do exist and they are pretty easy to find. Our recommendation would be to make sure to shop around and compare. Don’t just use the first one that you come across. Mortgage lenders, title company, local real estate professionals and real estate investing clubs will usually be able to provide you with some resources.Hard
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