Hard money loans, sometimes referred to as “bridge loans,” are a type of financing typically used in real estate investment. Hard money lenders are usually not banks, but private individuals or companies instead. With this type of asset-based loan, the property itself is used as collateral. This kind of funding is generally quicker and simpler for borrowers, though it can be more costly when it comes to interest and fees because of the inherent risk to the lender.
How Do Hard Money Loans Work?
Hard money loan financing is a way to borrow money using a property as collateral. Traditional mortgage lenders are concerned with your credit scores, financial history, and general ability to repay them. As such, the lending application and approval process can be lengthy and tedious while the lender investigates these matters. With a hard money loan, this is not the case. Borrowers can access money quickly because hard money lenders are less concerned with your personal finances and credit score, but instead concentrate on the value of the property. Since the property is used as collateral, if you default on the loan, the borrower will take the property and sell it to recoup their money.
Hard money loans can be approved and funded within days. The loan term can last from a few months to several years, though typically it would not make financial sense to hold on to a hard money loan for that long because their interest rates are high compared to alternatives like a conventional mortgage.
Hard money borrowers make regular monthly payments on their loan, including interest and relevant fees. Sometimes, borrowers may request reimbursements from their lending partner for particular property rehabilitation projects along the way if that is part of their agreement.
Once the property is sold, the borrower pays the lender back for the remainder of the loan, covers the closing costs, and keeps any remaining funds from the sale as profit.
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Do Hard Money Lenders Require a Down Payment?
Not all hard money lenders require a down payment, but some do. Most often, house flippers and other real estate investors need to put 20 to 30 percent down to mortgage a property with hard money financing. There are situations when borrowers can finance the entire cost of a property with hard money lending. Usually, only those with an excellent credit score and a successful track record in real estate investing are afforded that option. There are some predatory lenders who advertise hard money loans with zero down payment for all. Conduct some research before signing an agreement with companies making these types of claims. Unfortunately, if something sounds too good to be true, it probably is. There may be excessive fees, unrealistic payment schedules, balloon payment terms, or other duplicitous practices involved.
How Much Do Hard Money Lenders Charge?
Hard money lenders charge monthly interest on loans. This amount can vary from around 8 to 15 percent of the total loan amount. Borrowers must pay the monthly interest until the investment property is sold and they can pay the loan back in full. So, the number of months you’ll need to pay interest is determined by the length of time it takes to do any renovations, list the property, and close a sale. As such, it’s in the borrower’s interest to get these things done quickly.
Additionally, hard money lenders usually charge an origination fee, which can amount to between 1 and 10 percent of the loan total. This fee covers the administrative costs associated with the loan.
Many hard money lenders also require borrowers to make a down payment on the property. This can be around 20 to 30 percent of the cost. Putting this money down up front lowers risk for the lender and may allow for lower interest rates and more favorable terms for the duration of the loan.
Do Banks Offer Hard Money Loans?
No. Traditional financial institutions like banks and credit unions do not offer hard money lending. Hard money loans come from private lenders and individual investors.
The Best Hard Money Lenders
If you’ve decided hard money financing is the best fit for you, finding the right lender might be a challenge. We’ve outlined some of the top options when it comes to hard money lenders. The companies listed below provide service on a national level. There are other small lenders, such as North Coast Financial in California, that offer services exclusively to regional investors.
Best Overall Hard Money Lender
Patch of Land is a real estate crowdfunding website that connects borrowers and lenders. Interest rates are low and the application to funding process is very fast. Additionally, Patch of Land has a dedicated customer service team that walks applicants through getting started and is very responsive to investor questions and needs along the way.
Most Customer-focused Hard Money Lender
RCN Capital provides “fix and flip” financing in 45 states. They finance projects on residential and mixed use properties, including single-family homes and multiple-unit dwellings. RCN only charges interest on your outstanding balance, not the total loan amount. Its loans have no early repayment penalty, which can help you save cash if you’re able to sell your investment property quickly and repay the loan.
Best Hard Money Lender for Seasoned Flippers
Finance of America has very competitive interest rates for residential and commercial property. Additionally, it will provide proven investors with a line of credit up to $10 million, so they can work on large projects or multiple properties at once instead of using other options like a cash-out refinance or business loans. Rather than examining a borrower’s personal credit history during the application process, Finance of America instead researches their track record with real estate investing.
Best Hard Money Lender for Rental Properties
Visio Lendng offers a portfolio of longer-term lending options and bridge loans intended for rental properties specifically. These loans are ideal for individuals looking to invest in vacation properties or multi-unit dwellings. Visio Lending’s interest rates are attractive. The company does not qualify borrowers based on personal income or credit score, so poor credit is not a barrier to entry for real estate investing.
Most Flexible Hard Money Lender
If you are lucky enough to have family or friends with a little bit of extra cash, they could potentially be an ideal lending partner. You can approach your personal contacts by proposing to pay them a higher interest rate than they are currently earning in a savings account. This is a win-win, because there is quite a bit of leeway between their existing rate and the rates that seasoned hard money lenders demand. Additionally, friends and family are unlikely to charge any fees and might be a little more lenient if something comes up and you need to make a late mortgage payment or request more funding. For some, adding a potential source of tension in a personal relationship is just not worth it. But, for others, loved ones make the best lenders.
What To Look for in a Hard Money Lender
When determining which lending partner is a match for you, there are several important qualities to consider.
Asking around is one of the best ways to get real-world feedback on any lender. A simple online search will lead you to reviews and rankings. The National Real Estate Investor Association has local chapters where members can provide referrals and share experiences with different private money lenders. Forum sites for real estate investors like BiggerPockets offer a virtual platform for networking and asking advice of others in the industry. Realtors, title companies, and mortgage providers in your local area can also give informed referrals, since they regularly conduct financing transactions with hard money lenders.
Check your lender for licensing when appropriate. The best companies for hard money mortgage loans will be registered with national organizations that can be found via the Nationwide Multistate Licensing System & Registry. Individual lenders may be licensed by their state department of real estate or have a real estate broker’s license. You can contact licensing boards to confirm membership and check complaints.
Speed and Simplicity
The primary benefit of a real estate loan of this nature is that it’s quick. Borrowers don’t need to be concerned with the lengthy application and underwriting process of traditional mortgage loans. Short-term loans that fund rapidly and have a straightforward application process are ideal for real estate investors like house flippers. Because they only intend to hold the investment property for a short period, these borrowers don’t have time to wait for conventional loan approval. A faster turnaround is possible with hard money financing because there is less red tape and not as much scrutiny of the borrower’s finances like their debt-to-income ratio and FICO score. Because the property serves as collateral on the loan, there is less risk for the creditor and they can close these loans in a matter of a few days.
If your lender is making you jump through hoops or wait a long period to access your loan funding, they are likely not the right choice. A hard money mortgage is short and sweet by nature. The best hard loan lenders will not overcomplicate the process or leave you waiting for your funds.
Hard money lending is not the most cost-effective mortgage option comparatively because of its relative risk. There can be quite a bit of variation when it comes to the overall expense of the loan. It’s important to price shop interest rates and ensure you understand the structure of your loan and any fees involved.
Generally, interest rates on hard money loans will be between 8 to 15 percent. Interest rates on traditional loans like a mortgage range from around 3 to 6 percent. Because hard money financing is considered riskier, lenders charge more to hedge their bets. Rates will vary based on the creditor and the buyer’s unique circumstances. Interest rates also differ regionally based on local competition.
In addition to interest, many hard money loans have origination points. Origination points are a type of fee borrowers must pay to handle the processing of the loan and other costs to the lender. Typically, one point is equal to 1 percent of the loan. Some lenders might charge up to 10 points on a hard money loan. It’s essential to know whether or not your lender charges an origination fee so you can decide if that cost works within your budget and plan accordingly.
Most costs associated with a hard money loan are determined by the loan-to-value ratio. This is calculated by dividing the loan amount by the property value. The higher the ratio, the more risk to the lender. The more risk to the lender, the higher the associated fees and interest rate. Some lenders calculate the loan-to-value ratio based on the property’s current appraisal, while others choose the after-repair value (ARV). Using the ARV increases the loan-to-value ratio, signifying a chancier loan and higher costs. Be sure to ask if your lender uses the current property value or ARV.
Look out for predatory practices and excessive costs and lender fees before you sign a hard money loan contract. Do not agree to work with a lender if you feel you may be getting in over your head financially and will have a difficult time paying the loan back.
When you’re a real estate investor, your project commonly involves some rehabilitation of the property. Depending on your personal situation, the amount of your loan may need to cover more than just the cost of the property, but the renovation costs as well. While increasing the amount of the loan will up the risk level and potentially cost you more in fees and interest, it still may be essential to successfully complete your project.
To ensure you responsibly use the portion of your loan intended for rehabilitation, many hard loan lenders disburse these funds in a series of draws. Once your hard money loan is approved, a good lender will sit down with you to map out a draw schedule based on repair needs. When the work for one draw is complete, you will be reimbursed and begin work towards the next draw. For example, if a new roof is needed, once it is finished and the lender has inspected and confirmed it’s been done to satisfaction, they will reimburse you for that work and you can start working on the next project, perhaps updated piping.
Most hard money lenders will only fund rehabilitation work done by reputable licensed contractors. So, if you are a DIY house flipper, you may be out of luck when it comes funding renovation work with your hard money loan.
Hard money or bridge loans offer many benefits and drawbacks for real estate investors. Take the time to vet your lender and read the fine print on any contracts before jumping into a deal. Though these loans can be risky, they can also offer a huge upside for both investors and lenders.
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