So many first time investors are curious about hard money lenders. Who
are they? What is it? How do I get some? Is it beneficial? Let me share with you
some of the basic principals about hard money lenders. First of all, lets determine
what the term “hard money” means. When money is discussed between investors, it
is considered to either be “soft” or “hard”. Typically soft money is easier to qualify
for and the terms are flexible. Hard money, on the other hand, is just the opposite.
It is much more restrictive. Not in that it’s more difficult to obtain, but the terms
are very specific and much more strict. They have to be, because most hard money
comes from private individuals with a great deal of money on hand. This is why hard
money is also referred to as “private money”. The money used for investment
purposes comes from people, just like you and I, not a typical lending institution.
So their first priority is to protect their investment capital. This is why the terms
have to be so strict. If it were your money, you would want the same.
So what are some of the terms of “hard money lenders”? Obviously it
varies from lender to lender. It used to be that hard money lenders would lend
solely based upon the deal or property at hand. They would only lend up to a
certain percentage of the fair market value of the property, that way in the event of
default, the hard money lender would profit handsomely if they had to foreclose or
sell to an end buyer. Now, you will find that many hard money lenders, if they want
to stay in business, require more than just equity to qualify. This is because the
laws now are favorable for consumers. Consumer protection laws, time consuming
and expensive court procedures, and so on have forced some hard money lenders
to become even harsher when applying for a loan.
It is good to know what the terms are when dealing with a hard money
lender so you can find the one that will fit your needs. Here are some of the
terms you can expect to see. Typically they will only loan you up to 70% ARV (after
repaired value). This means that a hard money lender can loan you up to
70% of what the home is worth in repaired condition. So if you find a home worth
$45,000 in the condition it’s in, and needs $20,000 in repair work, and after it is
repaired the current fair market value is worth $100,000, then typically they can
lend you up to $70,000, which would cover the cost of the house and the repairs.
Other terms you can expect are high interest rates. Interest rates vary from 12% –
20% annually and terms can last for 6 months to a few years. Many times these
rates vary depending on your credit score and experience. In most cases, there will
be closing costs or fees to use hard money. Typically hard money lenders will
charge anywhere from 2-10 points. One point equals one percent of the mortgage
amount. So charging 1 point on a $100,000 loan would be $1000. These are all
important things to consider when choosing a hard money lender.
Other things to consider are how quickly funds will be available. Many times, when
you find investment properties, you need to move quickly. Your ability to get access
to money quickly can make all the difference. It’s important to begin relationships
with potential hard money lenders as quickly as possible. You also need to be
aware of pre-payment penalties. Pre-payment penalties can really hurt your deal
and cut into your profits substantially. Try to avoid pre-payment penalties.
Many hard money lenders today will also require you to fill out a credit
application that may ask you for W-2’s and or tax returns, your most recent pay
stubs, and bank statements. Again, it’s all about protecting their assets. Yet, some
like the old fashion way where they only care about the deal so they do a drive by or
physically look at the property. Again it all depends on whom you deal with.
When should you use a hard money lender? Hard money is great for
beginning investors who may not have money or for those who have bad credit and
cannot qualify. Investors also use hard money when they need to purchase quickly.
Typical soft money or conventional loans take 30 days or more. Sometimes that is
to long. Using a hard money lender is also a creative way to finance a property.
Most like to call it “Nothing Down”. If you can borrow enough money to buy the
property, fix it up and then sell it under market value for a profit, then you’ve just
made money without any of your own money. Sure it will cost you money to borrow
that money, but the rewards out way the expense.
How can you find hard money lenders? There are hundreds of hard
money lenders waiting to lend you money. It could be your next door neighbor.
The best way to find hard money lenders is to talk to a mortgage company and ask
for referrals. You can also call a title company or a real estate agency. They deal
with buyers and sellers of houses every day. Shop around until you find the best
one that will fit your needs. Another way is search online for hard money lenders.
Some will lend nationwide – these typically want a credit check. If you find a hard
money lender in your area, they may just do a drive by.