A hard money loan is an equity or collateral based real estate loan made by a private investor or private lender. Hard money loans are sought when traditional banks will not lend for various reasons such as property in foreclosure, credit problems, investor/house-flipper or difficult to verify borrower income due to self employment.
Construction loans, investment properties, large or unusual property loans such a ranch or apartment complex also utilize hard money loans. A big difference in hard money loans is the turnaround time. Hard money loans can often be completed in as little as two weeks but it comes at a much higher cost.
The key to using a hard money loan is to have a plan to refinance. Using a hard money loan can be a good way to get you through tough financial situations. However, this type of loan is only designed to be a temporary fix. This means that you may have to come up with a way to refinance the loan as soon as possible.
Categories of Hard Money Borrowers
Hard money loans can be used for owner occupied single family residences, condominiums and town homes.
Hard money loans can offer a temporary fix to borrowers facing foreclosure. Hard money lenders can refinance a borrower and the borrower can pay off the original lender and gain time to sell the property. The borrower can also rebuild credit by making payments on time for 1 to 2 years and refinance into a regular, more favorable mortgage loan.
Bad Credit Borrowers
Borrowers who cannot qualify for conventional loans can use a hard money loan as a solution. Borrowers who carry a lot of debt may also qualify for a hard money loan. Hard money lenders or private investors will look for sufficient equity and the ability to repay the loan more importantly than credit history. Borrowers who had a recent bankruptcy or foreclosure may need to consider a hard money mortgage loan.
Self Employed Borrowers
Self-employed borrowers with hard to verify, inconsistent or unconventional income may turn to a hard money loan. Hard money lenders are more likely to loan to someone with little documentation.
Good Credit Borrowers
Some borrowers may have good credit but little time to get the money they need for a real estate transaction. Hard money loans can be finalized in as little as two weeks.
A hard money bridge loan is used for a short period of time until a permanent loan or financing can be secured. Bridge loans provide a solution to make quick acquisitions, act on business or investment opportunities. Bridge loans are also used to close a transaction while another is being sold.
Large Cash-Out Amounts
Borrowers who wish to take hundreds of thousands of dollars out of their homes and traditional lenders will not approve.
Home flippers are big users of hard money loans. House-flipping is when homes are bought and sold within 12 months. House-flippers often utilize hard money loans because the loan amount is based on the anticipated sales price of the home after improvement costs and the loan is backed only by the hard asset which is the property. House-flippers can avoid a stringent assessment of their credit scores, income and debt-to-income ratios.
Unusual and Hard to Appraise Properties
- Second Homes, Vacation Homes, Investment Properties
- Land (residential and commercial)
- Apartment Buildings
- Mobile Home Parks
- Office and Medical Buildings
- Warehousing and Storage Facilities
- Ranch Homes
- Single and Multi-Unit Retail
- Mixed-Use Property
- Industrial & Automotive
- Hotels and Motels
- Resorts, Golf Courses, and Athletic Clubs
Hard money construction loans are very common. Depending on the real estate market and what is being built, construction loans can be considered high risk. Some traditional lenders will not even touch construction loans.
A hard money construction loan can be used to construct a building or to make improvements to real property. The collateral for the loan can be the land or the improvements. A construction reserve account is opened to maintain disbursements throughout the duration of the construction.
Private lenders and investors make up the bulk of hard money lenders. They are willing to make unusual loans banks and even sub-prime lenders will not touch. Borrowers dealing with a hard money lender should not expect to be offered grade-A terms. Private money mortgages have rates well into the double-digits and come with several upfront fee points. Borrowers will probably need to have at least 30-40 percent equity in their homes because hard money lenders limit borrowers’ loan-to-value ratios so they can make money off their properties if they have to foreclose.
Terms of a Hard Money Loan
Interest rates typically start at 10.00% and up depending on the investor, borrower qualifications, loan amount and purpose, property type, location and lien position. Expect broker and lender points to be added to the loan. Hard money loans are expensive and brokers can charge as much as 5 points for the loan. Other terms may include the following:
- Normally there is no pre-payment penalty.
- Hard money loans can be set up as balloon payments due in 1 to 2 years but typically they are for short periods of time–6 months. At the end of the loan period borrowers will need to refinance.
- Maximum loan-to-value ratio is from 50 to 70 percent. Some lenders will go up to 75 percent.
The interest rates are no doubt much higher than typical mortgage loans but can be worth it if you can refinance or sell the property in a relatively short period of time.