It happens to everyone in the real estate investment world. You’re trying to get a deal on an investment property and the bank won’t approve you on a conventional loan for the purchase. This happened to me several years ago and my mortgage broker suggested getting a hard money (aka Bridge) loan instead.
From the first day I got approved for my first hard money loan and up until today, I’ve financed over one million dollars with hard money, it’s insane to think about sometimes.
Below, I’m going to walk you through everything you need to know if you’re considering a hard money loan for buying any kind of business asset or commercial/residential real estate investment property.
What Exactly Is A Hard Money Loan?
The way my loan broker explained it to me was this: Hard Money Loans are secured by real property and are funded by private investors. It’s an asset-based loan, and your rental property will be the asset that is secured. If you don’t pay back the loan, you will lose your rental property in foreclosure.
The funding for hard money loans typically comes from private investors, the interest rate is going to be higher than a conventional mortgage loan and the payment term will be for a short duration, typically between 12 – 36 months.
Sometimes hard money loans are used as a bridge loan, which is used for bridging a transition on the purchase of a property until a better long-term loan can be secured.
A perfect use case would be when trying to buy a new home in a competitive real estate market while you are already a homeowner. Competitive real estate markets have lots of buyers bidding up prices which makes it difficult to lock in on a deal. So, you might only want to sell your existing home if you are guaranteed to have your new home purchased ahead of time for a price that works for you.
A mortgage or hard money loan broker can look over all of your numbers and advise you on the best options for you to take advantage of.
The Pros and Cons Of Using A Hard Money Loan
There are many advantages and disadvantages to using Hard Money, make sure to review the pros and cons very carefully!
The Pros Include:
- A Fast Approval Process: When you have a hot property you need to close on, hard money will give you the cash needed in as little as 7 – 14 days.
- Less Paperwork: Because a hard money loan does not look at income and credit scores, lenders do not require a lot of paperwork from the borrower.
- No Red Tape: When you work with a private lender, you are not dealing with the restrictions of a large financial institution. This makes negotiating terms quicker, easier, and more creative for your real estate investment deal.
- There’s only one con that makes hard money loans bad over the long term, they are expensive with high finance charges. It’s private money and those investors want to get paid for taking the risk of loaning out money to you. So when the time is right, refinance your short term hard money loan into a conventional financing program.
Hard Money Loans Vs. Just Using Cash
For most investors, paying cash for a real estate deal would work fine if the deal (house, duplex, apartment building) only costs from $50k to $200k. And, in cities like San Antonio, Spokane, Fort Lauderdale, Houston, Dallas, Atlanta, Memphis, and Jacksonville; a cash purchase might actually be a reality for some seasoned investors.
But in expensive cities like San Francisco, Sacramento, Los Angeles, New York City, Seattle, Las Vegas, Toronto, Boston, Orange County, Philadelphia, Chicago, and Miami; even a seasoned investor will use hard money instead of cash because your cheapest deal might start at 300k or more for a decent fixer upper. From a business perspective, it does not make sense to tie up all your liquid cash in one deal.
Popular Questions Regarding Hard Money Loans
A quick tip: Before you consider getting a hard money loan, make sure you understand as much as possible about its terms and the reasons. Let’s review a few popular questions below…
How are hard money loans best used?
As I mentioned earlier, one of the best uses for a hard money loan is doing a fix and flip on a residential house. You know those Home Flipper shows you watch on HGTV? A lot of those deals are done with hard money loans to cover the purchase cost of the property. Even ranchers and farmers who need to buy farmland in states like Michigan, Texas, Indiana, Virginia, Illinois, Oklahoma, New Jersey, Maryland, California and Arizona will consider using a hard money loan.
How much money can I get from a hard money loan?
The amount of money a lender will lend in a hard money loan is determined by a loan to value ratio (LTV). Most lenders will lend 65-75% of the home’s current value. Some will loan this amount based on the property’s value after repairs. For doing 90% or 100% LTV deals, it’s quite rare and might be possible if a strong relationship exists with the borrower and private lender.
My experience with 100% financing: I’ve only done 100% financing with a hard money loan on a few occasions, it was when the local real estate market was trending up 20% or more per year, which is not very often!
Do hard money loans have No Doc programs?
It’s almost a No Doc because a credit check may not be required. You may not have to show paycheck stubs or income statements for your business either. If you’re LTV is 70% or more, it’s safer for the investor making you the loan, so they will have less restrictions.
How long is the underwriting process for hard money loans?
Speed is crucial in the hard money loan process so underwriters should be able to conduct the underwriting in 24 -72 hours. The exact procedure may vary from lender to lender, but it will require a completed loan application, a purchase contract for the property and a scope of work for renovations. A property appraisal will also be ordered, if required.
How to calculate hard money loan payments?
It’s best to use a hard money loan calculator. You’ll need to know what the typical hard money loan percentage rates are too, right now the usual rate is between 7.5 and 15% in 2020.
What are the typical amount of points on a hard money loan?
One point generally equals one percentage point of the loan. In hard money loans, points generally range from 2-4% of the total loan amount.
And there you have it, everything I’ve learned about using hard money loans for real estate investing. There’s a lot of people out there who don’t agree with the idea of leveraging debt to make money. In the world of real estate, leveraging debt is perfectly normal. But, please do educate yourself about finance and work with the right financial professionals so you don’t get screwed. Knowledge is power and it’s up to you understand everything you’re getting into, when you wheel and deal.