Things You Should Know On How Do Hard Money Loans Work

Hard money loans are typically funded by a group of investors or a private investor. These types of investors are completely different from conventional lenders such as a credit union or a bank this is how to do hard money loan works

What are the terms and requirements for hard money loans

The term for a hard money loan can vary but usually, it is around 12 months. For hard money loan requirements, sometimes it is extended to a longer-term including 2 years or longer. Normally, the monthly payments for this type of loan include only the interest or sometimes the interest and a little bit of principle. In most cases, it is only the interest with a balloon payment at the end of the term.

Amount to receive

The amount of money that a borrower can expect will be based primarily on the value of the property offered for collateral. The property offered as collateral may be one that the borrower is trying to acquire or it may be a property that he already owns. Lenders of hard money are mainly concerned with the value of the property rather than the credit score of a borrower. Many people who use this type of lending company often have difficulty securing conventional financing due to bad credit, a short sale, or a recent foreclosure. A hard money lender will usually say yes when the bank says no.  

A borrower usually can receive money for any type of property including commercial, industrial, single-family residential, or multi-family residential. However, there are certain hard money lenders who only lend money on specific property types. They do this because they feel comfortable and have knowledge about a specific property type. Therefore, it is important to determine which hard money lender will provide you with a loan for your particular type of property.

Good credit and bad credit

It should be stated that a hard money loan may not be appropriate for every type of transaction. If you have a good credit history and want to purchase a primary residence, then perhaps it may be better to go through conventional financing at a bank of your choice. However, conventional bank financing will have a lengthy approval process. Hard money loans for bad credit might be possible to get longer terms, might pay more in the form of a higher interest rate. 

This is one of the main reasons why someone may want to borrow from a hard money lender. Hard money loans often are a better choice for land loans, construction loans, fix and flips, credit issues, or when money is required quickly. A hard money loan refinance pays off one or more loans secured to the property, which results in a new loan, generally with a bigger principal balance. In other words, Mortgage Refinancing is a Hard Money Loan. 

Hard Money Lenders

People who love to invest in real estate often choose a hard money lender. The main reason why they do this is to fund a loan quickly. In most instances, a hard money lender can provide funds within a week. In comparison, a credit union or bank may take 30-50 days to have a loan funded. The application for a hard money loan can be completed in a day or two and often approved the very same day. This type of time-frame will never be available at a conventional financial institution.

Another major reason why someone may choose a hard money lender is because of rejection. Banks and credit unions can easily reject a conventional loan because of credit issues and so forth. Also, sometimes life does not go exactly as planned and a borrower may have recently changed jobs. Banks notoriously reject loan applications because of insufficient income history. A hard money lender, on the other hand, looks past these types of issues and will provide the funds to the borrower because there is sufficient equity available with the property.

Hard Money Loans Interest Rates

The hard money loan rates interest that a borrower can expect to pay will depend on the region and the lender. For example, California has an abundance of hard money lending firms and therefore they offer rates lower than in other parts of the country. However, it is important to remember that a hard money lender is positioned to take more of a risk as opposed to a conventional bank loan. Since the risk is higher, the interest rate will also be higher. A hard money loan can have an interest rate of between 10-15%. However, interest rates can greatly vary depending on loan to value ratios.

Hard money lenders use a basic formula to determine the amount of money that can be offered to a potential borrower. It is determined simply by dividing the value of the property with the ratio of the loan amount. This formula is known as the LTV, loan-to-value. Typical hard money lenders will provide funds anywhere between 65-75% of the value of the property offered.

There are also lenders who will base a loan amount on an after-repair-value (AVR). This amount will be the value of the property once the borrower has done improvements. Obviously, an-after-repair value loan is riskier and therefore, it will have a higher interest rate attached to it. Loans of this sort can often include a 15-18% interest rate. Even though the interest rate may seem exorbitant, a borrower will still feel that he can generate a profit from the real estate project.

As mentioned previously, a hard money lender’s principal concern is the collateral of the property being used. They do not put too much consideration into a borrower’s previous credit history or rating. However, they will take an interest in how the borrower plans to repay the loan. The most common way offered as an explanation is to improve the property and then resell it.

It is important for a borrower to only borrow money from a reputable hard money lender. You can do an Internet search for lenders in your area. This will be a good way to begin your contacting and evaluating process on which lender you want to use. 

Also, you can attend a real estate investor club meeting in your area. Most cities have these types of club meetings which are well attended by hard money lenders. Lenders attend these meetings as a way to network with potential borrowers. You can also ask other real estate investors who they might recommend.

Conventional mortgage brokers, real estate brokers, and other real estate professionals often have information about which reputable hard money lenders are the best to use. Remember, even though a hard money lender wants higher interest rates than a conventional financial institution, there are times when obtaining a loan quickly can prove to outweigh the higher interest costs.