Hard Money Loans of March 2023

What is a Hard Money Loan?

A hard money loan is a type of short-term loan that is secured by real estate property. Unlike conventional loans, which are typically based on the borrower's credit history and income, hard money loans are based primarily on the value and condition of the property being used as collateral. These loans are typically used by real estate investors to purchase, renovate, or refinance investment properties and are often used as an alternative to traditional financing when time is of the essence, or when a borrower may have trouble qualifying for a conventional loan.

Hard money loans typically have a higher interest rate and a shorter repayment term compared to conventional loans. They are often used for fix-and-flip projects, where the borrower plans to buy a property, make necessary repairs, and sell it for a profit within a short time frame.

It's important to note that hard money loans are more expensive and come with more risk than traditional financing options, so they may not be the best choice for everyone. Borrowers should carefully consider the terms and conditions of a hard money loan and seek professional advice before making a decision.

How Hard Money Loans Work?

Hard money lenders pay special attention to the value of the property the borrower offers them as collateral. All repayment terms, such as interest rate and loan term, are based on the value of the borrower's real estate, car, or other property. At the same time, the borrower cannot take out a loan for an amount equal to 100% of the property's market value. Usually, lenders offer loan amounts equal to 65% to 75% of the property's value. If the borrower loses the ability to pay the loan, the collateral will become the lender's property.

This loan has a short repayment period, usually from 1 to 3 years. Such a short repayment period implies that the interest rates of such a loan are usually higher than those of other credit options. The interest rate is also high because such a loan offers a quick receipt of a large amount of money without demonstrating an ideal credit history.

Such a loan is popular among property flippers who buy non-repayments on credit, make renovations and install improvements and then sell for more than the original price.

Key Features

Here are some of the key features of hard money loans:

1. Secured by Real Estate. Hard money loans are secured by real estate property, and the loan amount is typically based on the value and condition of the property.
2. Short-Term. Hard money loans have shorter repayment terms than traditional loans, often just a few months to a year or two.
3. Higher Interest Rates. Hard money loans usually have higher interest rates than traditional loans, as the lender is taking on more risk.
4. Lower credit Score Requirements. Hard money loans may have lower credit score requirements than traditional loans, as the loan is based primarily on the value of the property being used as collateral.
5. Fewer Regulations. Hard money loans are not subject to the same regulations as traditional loans, which may make the approval process quicker and easier.
6. Specialized Use. Hard money loans are typically used by real estate investors for short-term investments, such as fix-and-flip projects, while traditional loans are used for a wider range of purposes.
7. Stricter Loan Conditions. Hard money loans often come with stricter loan conditions, such as interest-only payments or balloon payments, which may make them more difficult to repay.
8. Quick Funding. Hard money loans can be funded more quickly than traditional loans, which may be important for real estate investors who need to act quickly on investment opportunities.
9. Higher Fees. Hard money loans may come with higher fees than traditional loans, including appraisal fees, loan processing fees, and closing costs.

It's important to carefully consider the key features of hard money loans and seek professional advice before making a decision. Hard money loans can be a valuable tool for real estate investors, but they are more expensive and come with more risk than traditional financing options.

Pros and Cons

Pros

1. The most significant advantage of a hard money loan is the simple and fast process of obtaining a loan. The approval process is faster than in other traditional loans, as lenders pay attention only to the value of the borrower's property and not their financial situation.
2. Hard money lenders do not spend much time reviewing the borrower's financial documentation and performing a credit check. Therefore the borrower receives approval from the lender very quickly. The process can proceed even faster if the borrower already has an established relationship with the lender.
3. Hard loan investors do not so closely monitor that the borrower makes payments on time. This is because, in some cases, it is beneficial to the lender that the borrower does not have the opportunity to repay the loan and defaults. In such situations, lenders see the benefit in selling the property on their own and making a profit from it.

Cons

1. Hard money loans have one of the lowest loan-to-value (LTV) ratios among all credit options. This is because the property purchased by the borrower is the only guarantee of the security of such a loan for the lender since private investors do not check the credit history of the borrower. The loan-to-value (LTV) ratio for such loans varies from 65% to 75%.
2. The interest rate on hard money loans is much higher than for many other traditional loans and even subprime loans. Private investors themselves set the interest rate for loans that they issue, and most often, in pursuit of profit, set the highest rates. Such high rates can also be explained by the fact that lenders offer the borrower a quick receipt of a large amount of money and charge a large fee for such a convenient service for the borrower.
3. Some hard money lenders may not accept the borrower's primary residence as collateral because of regulatory oversight and compliance rules.

Conclusion

Hard money loans are suitable only for experienced property flippers. A borrower with other goals should pay attention to other credit options, even though they involve a credit check and a long time to get approval. The long wait is worth it to get a loan with a high loan-to-value (LTV) ratio. If the borrower does not have a specific purpose for taking a hard money loan, then they only risk losing funds and paying much more interest than for any other loan.

Hard money vs. Private money

Any individual and any organization can act as a private money lender. Therefore, credit conditions vary greatly depending on a particular lender. Hard money lenders, in most cases, will not change any repayment terms at the request of the borrower. At the same time, a private money lender can have flexible loan terms, and the borrower can easily negotiate with such a lender. The borrower can, for example, extend the loan term or lower the interest rate if the lender agrees.

However, the fact that any individual or organization can be a private money lender has a significant drawback. Private money lenders are not regulated by law in any way, which can create some problems for the borrower. The lender may turn out to be a fraudster and can change the terms of the loan as he wishes without the borrower's consent. Hard money lenders have lender licenses and cannot commit illegal actions.

Another problem with private money lenders is that it is quite difficult for the borrower to find them. Hard money lenders, like traditional lenders, advertise themselves and can easily be found on the Internet. Private money investors find clients by word of mouth; therefore, finding them is much more difficult.

Hard Money Loans vs. Traditional Loans

Hard money loans and traditional loans are both types of financing, but they have some key differences:

1. Collateral. Hard money loans are secured by real estate property, while traditional loans may be secured by the borrower's assets, such as a savings account or other assets, or unsecured, meaning they are based solely on the borrower's credit history and income.
2. Approval Process. Traditional loans are typically based on a borrower's credit history, income, and debt-to-income ratio, while hard money loans are primarily based on the value and condition of the property being used as collateral. This means that hard money loans can be approved more quickly and with fewer requirements than traditional loans.
3. Interest Rates. Hard money loans usually have higher interest rates than traditional loans, as the lender is taking on more risk.
4. Loan Term. Hard money loans have shorter repayment terms, often just a few months, while traditional loans have longer repayment terms, often several years.
5. Purpose. Hard money loans are often used by real estate investors for short-term investments, such as fix-and-flip projects, while traditional loans are used for a wider range of purposes, including home purchases, personal loans, and small business loans.
6. Repayment. Hard money loans may require interest-only payments or balloon payments, while traditional loans usually have a consistent monthly payment over the loan term.

In summary, hard money loans and traditional loans are different in terms of collateral, approval process, interest rates, loan term, purpose, and repayment. Borrowers should consider these factors when deciding which type of loan is best for their needs.

How to Apply For a Hard Money Loan?

Here are the steps to apply for a hard money loan:

1. Determine Your Borrowing Needs. Before applying for a hard money loan, determine the purpose of the loan and the amount you need to borrow. This will help you to choose the right lender and loan product.
2. Research Lenders. Look for reputable hard money lenders in your area, and compare the interest rates, loan terms, and fees they offer. You can also ask for recommendations from real estate professionals or friends and family who have used hard money loans.
3. Prepare a Loan Application. You will need to provide the lender with information about the property you want to use as collateral, your financial situation, and your experience as a real estate investor. You may also need to provide a property appraisal, a business plan, and other financial documents.
4. Submit the Loan Application. Once you have gathered all the required information, submit the loan application to the lender. The lender will review the information and make a decision about the loan.
5. Provide the Collateral. If the loan is approved, you will need to provide the lender with a security interest in the property you are using as collateral. This typically involves signing a mortgage or trust deed that gives the lender the right to foreclose on the property if you default on the loan.
6. Close the Loan. Once the collateral is in place, the loan can be closed, and the funds can be disbursed.

It's important to carefully review the terms and conditions of the loan before signing any agreement. Be sure to ask the lender any questions you have, and consider seeking professional advice if necessary. It's also important to remember that hard money loans are more expensive and come with more risk than traditional financing options, so they may not be the best choice for everyone.

How to Choose a Lender

When choosing a suitable hard money lender, the borrower should pay attention to the geographical location of the lender. Taking into account the fact that hard money loans are mainly taken for the purchase of the real estate, it is possible to say that the geographical location of the lender is very important. The appraiser whom the lender will hire to determine the value of the property must inspect the property that the borrower is acquiring. Contacting a lender from another state can noticeably slow down the process of obtaining a loan.

The borrower needs to compare interest rates and loan-to-value (LTV) ratios of as many different lenders as possible. When comparing, the borrower needs to look for the lowest interest rate and the highest LTV ratio. LTV ratios for this type of loan are usually low, so it is important to look for the maximum possible percentage.

If the borrower has already taken a hard money loan in the past, then they should contact the same lender since, in this case, the process of obtaining funds may take only one day. The usual time of approval is about seven days. The borrower is recommended to look for a lender with a short time of approval.

Another important factor when choosing a lender is the availability of a license. Hard money lending requires a license, and the borrower should check it in order not to run into scammers and not lose money.

Recommendations on the eligibility

Although hard money lenders usually do not pay attention to the borrower's credit history, it is still recommended to have at least a 600 credit score. In some cases, for the sake of guaranteeing the security of their investments, the lender can check the borrower's credit score. For those borrowers who purchase real estate for a long time, for example, for renting, it is recommended to have a minimum of 680 credit score since such loans are riskier for the lender.

Even though there are lenders among hard money lenders who are not against the borrower defaulting for the independent sale of property, for most lenders, it is still important that the borrower is solvent. The borrower needs to have a certain level of income so that the debt-to-income ratio is not too high. To confirm the borrower's income level, some lenders may ask borrowers to download pay stubs, tax returns, bank statements, and W-2s.

Bank statements may also be required to confirm the ability to make a down payment. Usually, the down payment for a hard money loan is from 20% to 30%.

Property flippers should also take into account that hard money lenders usually require an After-Repair Value (ARV) of up to 75% of the property.

Some borrowers who are property flippers can get a loan faster if they have had a successful experience of house flipping in the past.

Requirements

Here are some of the typical requirements for obtaining a hard money loan:

1. Real Estate Property. The loan must be secured by real estate property, and the loan amount is typically based on the value and condition of the property.
2. Proof of Ownership. You must provide proof of ownership of the property being used as collateral, such as a title report or property deed.
3. Appraisal. An appraisal of the property may be required to determine its value and condition.
4. Business Plan. You may need to provide a business plan that outlines your real estate investment strategy and how you plan to repay the loan.
5. Financial Information. You may need to provide financial information, such as tax returns, bank statements, and proof of income, to demonstrate your ability to repay the loan.
6. Collateral Documentation. You will need to provide the lender with a security interest in the property you are using as collateral, typically through a mortgage or trust deed.
7. Insurance. You may be required to provide insurance coverage for the property being used as collateral.

It's important to keep in mind that these requirements may vary from lender to lender and may depend on the type of loan product you choose. Be sure to carefully review the terms and conditions of the loan before signing any agreement, and consider seeking professional advice if necessary.

Ways to Pay a Hard Money Loan Back

Before taking a hard money loan, the borrower should carefully consider the repayment plan. The main difficulty of paying hard money loans is a special repayment schedule. This loan has a short life span, and therefore, in addition to interest payments for 1 to 3 years, the borrower must pay the principal to the lender in one payment after the loan term ends.

For the borrower to calculate the budget and make a repayment plan for the loan, they need to use the hard money loan calculator. Such calculators can be found freely available on the Internet. The borrower needs to enter the loan term, interest rate, and property value into the calculator. The calculator will automatically calculate how much the borrower will need to pay to the lender.

Property flippers usually have no problems paying hard money loans as they buy real estate, install improvements, make repairs, and sell at a higher price during the year. This is how they pay off the lender and make a profit. Borrowers who have acquired a non-residential property for rent or commercial purposes do not have the opportunity to close the loan so quickly. Refinancing is suitable for them. Refinancing allows the borrower to extend the loan term and split the principal amount into equal monthly payments. Borrowers can take cash out to refinance loans from a bank or another traditional lender.

Legal Regulation

Hard money loans are regulated by the state in which the property being used as collateral is located. In general, states have laws and regulations in place to govern the terms and conditions of hard money loans, including the interest rates that can be charged, the terms of repayment, and the rights of the lender and borrower. Some states may also have specific regulations related to the use of hard money loans for real estate investment purposes.

It's important for borrowers and lenders to be aware of and comply with these regulations, as failure to do so can result in legal and financial consequences. Borrowers should also be aware of their rights and responsibilities under the terms of the loan agreement, including their obligation to repay the loan and the rights of the lender to take action in the event of default.

In addition to state regulations, hard money loans may also be subject to federal laws, such as truth-in-lending laws and consumer protection regulations, which are designed to ensure that borrowers are treated fairly and provided with accurate information about the terms of the loan.

If you are considering a hard money loan, it's a good idea to consult with a financial advisor or an attorney who can help you understand the regulations and requirements that apply to your specific situation. This will help ensure that you enter into a loan agreement that is in your best interest and complies with all relevant laws and regulations.