Real estate investors or borrowers who haven’t previously used hard money loans often have many questions. Below are some frequent questions and simple answers. Please feel free to contact North Coast Financial with any questions regarding hard money loans.
What is hard money?
Hard money is a type of capital available for loan outside of traditional lending systems such as banks and credit unions. The money comes from private investors and individuals. It is also known as private money.
What is a hard money loan?
A hard money loan is short term loan secured by real estate. This type of loan is often used by real estate investors to quickly acquire the capital needed to purchase and improve a property. The investor may later choose to refinance the property with long term conventional financing or to sell the property in order to pay off the hard money loan.
What is a hard money lender?
A hard money lender is a mortgage broker who acts as the intermediary between the borrower and the investor. The hard money lender is responsible for bringing the parties together to agree on terms, completing the loan documentation and serving the loan. In some cases the hard money lender can also be the investor who is providing the capital to the borrower for the hard money loan.
Where do the funds for hard money loans come from?
Hard money loans are funded by private investors who invest in trust deeds. The funding may come from one specific individual or from a large fund of money that multiple investors contribute to.
What is the difference between a hard money lender and a bank?
Hard money lenders are able to approve and fund a loan much more quickly than a bank and do not require as much documentation. Approval and funding from a hard money lender can be completed within a week. A loan from a bank will take at least 30 to 45 days. Hard money lenders are primarily concerned with the value of the real estate that will serve as collateral for the loan and the loan to value ratio, while the banks focus on the borrower’s credit rating and income.
What types of properties do hard money lenders lend on?
Hard money lenders can lend on any type of property such as single family residential, multi-family residential, land, industrial, retail and office buildings. Many lenders have specific types of properties that they specialize in. Hard money lenders can lend on owner-occupied residences but many will not or prefer not to due to the extra regulations that come with these types of loans.
What are some of the benefits of a hard money loan?
- The application process is quick and easy
- The loan can be funded very quickly, usually within 5 – 10 days
- A purchase offer that includes hard money financing is considered a stronger offer by the seller compared to conventional bank financing
- The strength of an offer coupled with hard money loan financing may allow the potential buyer to negotiate a better purchase price
- A buyer can still obtain financing with a hard money loan even if they have issues such as low credit scores, insufficient income history, recent short sales or foreclosures or a bankruptcy
- Quickly pulling equity out of an existing property in order to reinvest this capital elsewhere
- A borrower is still able to obtain financing once they have hit a limit on loans from conventional lenders
Why do borrowers choose to use a hard money loan?
- The borrower doesn’t want to go through the lengthy application process at a bank
- A bank has already denied the borrower’s request for a loan
- The borrower needs funding quickly
- The borrower has issues with their credit, income, a recent short sale, foreclosure or bankruptcy
- The borrower needs funds to purchase and rehabilitate a property for profit with a hard money rehab loan
What documents are necessary for a hard money loan?
Documents that may be needed for application process
- Loan application
- Tax returns
- Bank statements, proof of funds for down payment if applicable
Common Initial Loan Disclosures
- Mortgage Loan Disclosure Statement
- Equal Credit Opportunity Act Notice
- Fair Lending Notice
- Hazard Insurance Disclosure
Final Loan Documents
- Deed of Trust
- Escrow Instructions
- Payment Guaranty (if applicable)
- Arbitration Agreement (if applicable)
- Other documents based on the specific aspects of the loan
What are some of the disadvantages of a hard money loan?
- The interest rates on hard money loans are higher than conventional loans.
- The borrower must have 25% or more equity in the deal.
- Hard money loans are for short-term use only (generally up to 3-5 years).
- Article: Top 3 Advantages and Disadvantages of Hard Money Loans
How does one find a hard money lender?
Performing a simple search on Google for [your area] “hard money lenders” will produce a list of local lenders to begin contacting. Hard money lenders are often present at local Real estate investor meetings. Ask a trusted real estate agent, real estate investor, traditional mortgage broker or other professional in the real estate industry if they can recommend a hard money lender. How to find hard money lenders
How does one get a hard money loan?
After contacting a hard money lender, the prospective borrower must complete a loan application with their personal information and information about the subject property. The hard money lender will quickly review this information and determine if the loan is feasible. The credit of the borrower is of some importance but the most important factor is the loan to value (LTV) on the property. The subject property will then be appraised to ensure the property valuation is in the proper range. Once this is all complete the hard money lender will move forward in processing the loan and funding can be delivered in a matter of days.
How much do hard money lenders charge?
Hard money lenders charge an interest rate and points on the amount borrowed. The interest rates can range from 9-13% and the points range from 2-4 depending on the specifics of the desired loan. Some lenders may also charge extra fees such as a “processing fee”, “underwriting fee” or “document fee”. Other costs the borrowers will be responsible for are closing costs such as escrow and title insurance.
What are typical hard money lender terms?
A typical hard money term is generally 12 months, but longer terms of 2-3 years are usually available depending on the specific situation and borrower.
Will hard money lenders provide funding for a first trust deed and a second trust deed?
All hard money lenders will provide funding for a first trust deed. Fewer hard money lenders will provide funding for a second trust deed due to the increased risk of being in a junior position. Borrowers seeking a loan for a second trust deed should expect a higher cost loan (higher interest rate) due to the increased risk for the lender.
What happens if the borrower doesn’t pay off the hard money loan?
When a borrower defaults on a hard money loan they are in danger of being foreclosed upon and losing the property or properties which they used as collateral to secure the loan. Foreclosure is not the desired course of action for the lender as they would much rather prefer to be paid back in full for the balance of the loan without any additional hassle. When a borrower begins to miss payments, the lender will reach out and try to figure out what the situation is and how a foreclosure can be avoided.
Will a hard money lender provide funding for owner-occupied hard money loans?
Many hard money lenders will not fund owner-occupied hard money loans. Owner-occupied loans are more heavily regulated by the government and require additional paperwork and requirements. Federal regulations require borrowers to meet a debt to income ratio for all owner-occupied loans. Borrowers are forced to prove their income with tax returns or W2s and disclose their existing debt payments. Because of the extra regulations, many hard money lenders choose not to fund non-owner-occupied loans.
How are hard money lenders regulated?
Hard money lenders are regulated by their state Bureau of Real Estate. Hard money lenders must have a member of their company who holds a Real Estate Broker License.
How long does it take to receive funding from a hard money lender?
A hard money loan can be funded within a week or two. If needed by the borrower, a reliable hard money lender can fund a loan in as few as 3-5 days. This is a huge benefit to using hard money loans as banks could take 30 days or longer to fund the same loan request if it were to fall within their stringent guidelines.
Why are hard money loan interest rates higher than loans from a bank?
Banks hold money from their depositors and pay them an extremely low interest rate. The bank then loans this money out to borrowers at a higher but relatively low interest rate. Hard money lenders get funds from private investors (or fund the loans themselves) who expect a higher interest rate due to the increased risk taken on by the lender.
How do hard money lenders differ?
Besides the quality of service provided, hard money lenders differ by the types of lending criteria they adhere to as well as the costs they charge for the loan.
Lending criteria examples:
- Types of properties they lend on (commercial, residential, etc.)
- Loan to value (LTV)
- Ability to lend in 1st or 2nd position
- Owner-occupied properties vs. non-owner occupied
- Geographic locations
- Loan amounts available
Loan cost examples:
- Interest rates
- Points for loan origination
- Additional “document” or “processing” fees (not charged by North Coast Financial)
How does one invest in hard money loans?
Individuals with money to invest may be able to work with a hard money lender to fund hard money loan requests from borrowers. This is known as trust deed investing. The investment by the individual is secured by the real estate put forth as collateral from the borrower.
How do I receive a letter of interest (LOI) from a hard money lender?
Also known as a pre approval letter, a letter of interest is given to a prospective borrower by a hard money lender once the borrower has been approved for financing. The letter can then be submitted along with offers on properties.
The borrower must first apply with the hard money lender and submit a 1003 loan application to be approved. If approved, the lender will then determine what amount of funds they are able to lend to the borrower and create the letter of interest.
Can title of the property be held in an entity such as a trust, corporation or LLC for a hard money loan?
Title may be held in an entity but an individual(s) will still need to personally guarantee the loan.
Can I still get a hard money loan with bad credit?
Hard money lenders are much less concerned with a borrower’s credit and FICO scores. Hard money lenders instead focus on the equity in the property being purchased or refinanced. Credit scores alone should not prevent a borrower with bad credit from obtaining a hard money loan.
Do hard money loans have prepayment penalties?
A hard money loan may or may not have a prepayment penalty depending on the hard money lender and the specific loan scenario. When inquiring about a hard money loan ask the lender upfront what the prepayment penalty is if any.