Why use Hard Money Lenders?
Hard money borrowers choose to use hard money lenders for various reasons. The most common reasons why borrowers use hard money loans are the minimal requirements needed for loan approval and the speed and which the loans can be funded. Hard money lenders have far fewer requirements than conventional lenders and can fund a loan for investment property within days.
Real estate investors frequently use hard money lenders for investment property loans because they are able to receive very quick loan approval and funding in order to secure financing for a new purchase or refinance an existing property. If refinancing, the investor can refinance the existing loan amount or use a loan to pull cash out if enough equity in the property exists.
Borrowers looking to purchase a primary residence or borrower against a primary residence they already own choose to use hard money loans because they currently have poor credit or other issues on their record (short sales, loan modifications, bankruptcies, foreclosures, etc.) preventing them from obtaining bank financing. The borrower may also need financing sooner than the bank is able to provide.
Once the homeowner has improved their credit enough or waited for the issues to fall off their record they are able to refinance to a lower cost and long-term conventional bank loan.
Hard Money Loan Requirements
Hard money loan requirements for investment property loans (non owner occupied property) will vary from lender to lender. In most situations hard money lenders require a down payment from the borrower of at least 25-30%.
The borrower will also have to provide some evidence that they have sufficient cash or assets to cover the holding costs of the property such as monthly loan payments, property taxes, insurance and any other costs associated with the property.
The borrower will also need to explain to the hard money lender the overall plan for the property. Is it a short-term fix and flip, long-term rental or property that will be sold soon? The hard money lender needs to know the borrower ultimately plans to pay off the loan. If the borrower has sufficient real estate experience and a reasonable plan this will increase the likelihood that the hard money lender will approve the loan.
Hard Money Loan Requirements – Owner Occupied Property
There are additional hard money loan requirements for borrowers purchasing or refinancing their primary residence. Owner occupied hard money loans have increased requirements due to the current federal regulations. These regulations are mainly based on the borrower’s income and existing debt as well as the new debt they will be taking on when obtaining the new real estate loan. Even hard money lenders must follow these regulations for owner occupied property.
How do Hard Money Loans Work?
Hard money loans work similar to traditional bank loans but have less requirements and paperwork and they can be funded at a much faster rate. Hard money loans are short-term loans with real estate as collateral. The loans are funded by private investors as opposed to institutional lenders (credit unions, banks). Hard money loan term lengths are generally 1 to 5 years.
Hard money loans are commonly amortized over 30 years so the monthly payment is lower with a balloon payment being due at the end of the agreed upon loan term.
Once the hard money lender approves the borrower’s request the lender will open title and escrow if necessary and begin preparing all the necessary disclosures and documents for the borrower to review, sign and return. When escrow is ready for funds the hard money lender wires the money so the transaction can close.