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What are the Biggest Problems with Hard Money Loans?

What are hard money loans?

Hard money loans are an asset-based means of loan financing, typically issued by private companies or a small group of investors. Instead of taking into consideration the borrower’s creditworthiness via their credit score, the property they are buying is kept as mortgage to provide the loan.

Who needs hard money loans?

Hard money loans are suitable for investors, developers and house flippers who:

  1. Know how to raise a property’s value
  2. Can do some quick fixes in a property
  3. Sell a fixed property quickly at a significant profit

How do hard money loans work?

Hard money loans are short-term loans, provided to a borrower against real estate. Unlike traditional mortgage, where the lenders are usually banks or credit unions, the loan providers here are typically private investors, with easier eligibility criteria for loans. This not only makes these loans easier to access but the processing time is also much faster than traditional bank loans. Hard-money loans typically cover 80-85% of purchase and 100% of rehab not to exceed 65% to 75% of a property’s after-repair value (ARV).

What are the benefits of taking hard money loans?

  • Few eligibility criteria for loan approval
  • Credit history is not important
  • Secured per-approval within 2-3 days
  • Customized repayment facility
  • No prepayment penalties

Why are the interest rates on hard money loans higher?

Hard money loans are given by private investors, who are willing to take a higher risk than banks and traditional lenders, providing financing to an individual who might not be able to fulfil the credit score requirements and therefore might be unable to secure a bank loan. In return for this risk, a higher interest rate of 9-12% is charged. First time borrowers need to be extra sure whether they can afford the monthly repayments before signing the contract.

How to use the 4Cs of private financing to find the best hard money lender?

Credibility
  • Who are their other borrowers?
  • How many years have they been in the market?
Capital
  • What is the loan to as-is value, the size of the loan towards the purchase price at close?
  • What will be the size of the loan compared to the ARV (after-rehab value)?
  • Will the lender fund the difference between the as-is-value and after-rehab value after the completion of rehab?
Cost
  • What are their rate points?
  • How much do they charge as document fees, application fees, processing fees, underwriting fees, appraisals/BPOs, etc.?
Certainty
  • What is the source of the funds?
  • How much capital are they working with?

 

What are the qualities of a good hard money lender?

  • Offers 2-way communication for real estate investors
  • Have experience in analyzing investable property
  • Have a detailed and professional website
  • Respond to comments and questions quickly
  • Pay attention to finer details
  • Able to meet deadlines
  • Work as a team with the investor

What to avoid when choosing hard money loans?

  • Failure to research hard money lenders
  • Not comparing hard money loan terms
  • Turning to the first hard money lender you come across
  • Not having an exact idea of how much money you need to borrow
  • Making a commitment towards repaying the loan too soon (make sure you have an extension option)
  • Not paying attention to hidden fees and penalties for early repayment
  • Not properly valuing the as is and as repaired value
  • Not having appropriate scope of work and budget to get the home in optimal resale condition

What happens when you default on a hard-money loan?

If a borrower fails to repay the loan within the term specified, following can happen:

  • Higher default interest rate
  • Forfeiture of any portion of the loan amount paid
  • Foreclosure of the property for which the loan was taken

How to sell fix and flip homes quickly?

Step 1: Identify potential buyers

Step 2: Ensure effective marketing and advertising

Step 3: Price the home competitively, yet appropriately

We are here to assist you with your hard money loans.

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