One of the greatest resources a real estate investor can possess is a good lender. However, some deals don’t fit the traditional lenders criteria. This does not mean that you can not repay the property; it simply means that you may have to find alternative types of loans.
You will get a thorough explanation of hard money loans here before you get to the list of the best hard money lenders. Before committing to this financing option for your real estate purchase, you should have a thorough understanding of what hard money loans are and what they’re used for.
What’s a hard currency loan?
A hard money loan is a type of real estate loan for non-owner occupied property provided by a private lender. Hard money loans are usually short-term, ranging from six to 36 months, with a higher interest rate than traditional bank loans.
Hard money loans are accepted more than the borrower ‘s creditworthiness, based on the value of the real estate. Such loans are often used as they have an exceptionally quick approval time. In many cases, hard money loans are terminated within two to four weeks.
How is it that hard money loans are different from bank loans?
The lender itself is the principal difference between a hard money loan and a typical bank loan. Hard money loans are almost always offered by a private lender, whether it’s a private lending company or individual.
Because these loans are used for real estate owned by non-owners, they are not classified as home mortgages. This ensures that borrowers with hard money will demand higher interest rates and penalties, and get away with conditions that traditional loans would not require.
Even though the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) do not typically apply to commercial mortgages, traditional financial institutions still have regulations to follow. The Federal Deposit Insurance Corporation ( FDIC), and the National Credit Union Administration (NCUA) still regulate federally insured banks. Hard money lenders have no restrictions tied to them.
Which types of real estate do borrowers fund with hard money?
While a hard-money lender will lend on any form of non-owner occupied real estate, they usually search for circumstances with a fairly fast exit strategy so they know they will be paying out by the end of the loan term.
Fix-and – flip features
Hard money loans, with fix-and – flip assets, are very popular. Indeed many borrowers are even going to finance the repairs. Such types of deals are perfect for borrowers because typically flips are done within six months.
If the contractor pays the maintenance as well, they must measure the repair costs and question draws as the borrower wants them to pay for the work being done. This means that the funds are used for maintenance, which reduces the liability of the investor as they only send away parts at a time.
Many lenders of hard money even prefer to finance the repairs, so they know the project will be completed. If the creditor goes through the renovation and runs out of money, the purchase price may be less than the interest. They don’t have to worry about the borrower being unable to complete the job because of a lack of funds by financing the project.
Lenders of hard capital can also include short-term lending for investment property in residential real estate. The goal here is typically to refinance the property in 12 to 36 months, so that the hard money debt can be paid off.
Investors can turn to a hard-money loan for a rental property if they need to be able to quickly close the deal and have no time to go to a bank. When the rental house needs maintenance, they will may require a private loan before a broker funds the contract.
Similar to rental property loans, investors may need capital quickly to close on a multi-family property when there is not enough time for the traditional lending process to go through.
An investor may also buy a multi-family property that requires a lot of repairs, with little to no tenants. This will be difficult to get funded from a bank for this form of land, and they may try a hard money loan. They will do the job they need, then rent the property before refinancing it with a long-term loan.
An developer with a buyer to lease land to but no property to place them in is a growing scenario for commercial real estate. The buyer will see a empty property that the owner will rent out so they will purchase the property first to get it ready for the rental.
When the borrower may not have the funds to fund the loan, a bank may not wish to lend a vacant property planned for use as an invest. In this situation, a hard money loan can be useful for getting the deal done, making improvements for the tenant, and leasing it. If the occupant is in place and rent is paid a bank would be more likely to fund the house.
Hard-money loan interest and fees
The comfort and quick clearance comes at a premium, with a hard money loan. Lenders may demand more rates on loans of hard currency because they are loans with a greater risk and because they are short-term loans.
Longer-term investments from the sale of one deposit can receive interest for many years. Every six to 36 months the money invested in hard money loans has to be reinvested. Any time capital is spent in a loan there are extra expenses and potential risks.
Private borrowers’ interest rates start at about 7 percent for lower-risk transactions, but interest rates or loans are most generally about 10 percent, which can go up to 13 percent or more.
There are also additional payments which will be levied by the applicant to offset the expenses of handling the loan and any commissions being paid. It further means that they can make a return if the borrower takes off the debt before the term expires.
Standard payments for a loan of hard money include:
- Origin fee: Typically 1 to 3 per cent.
- Broker charges.
- Subscription cost.
- Subscription fee.
- Report planning bill.
- Treatment bill.
- Subsidy fee.
Such payments, not counting the origination fee, will add up to $3,000 to $5,000, and are mostly charged up front.
Guidelines for Loan-approval
Hard money borrowers usually don’t follow the same underwriting guidelines that banks do. In most situations, they don’t take the borrower ‘s assets out as a bank does. They still generally aren’t as worried with where the down payment funds come from.
Perhaps the provider would do a credit test but they typically only aim for a minimum credit score of 600 to 620. Mainly, they want to make sure that the borrower hasn’t defaulted on many debts or fallen in debt.
Price for land
The principal concern in the underwriting process is the value of the property and the market in which it is situated. Hard money loans represent a higher risk to the lender, so they want to make sure they can get their money back if they have to foreclose.
Typically there is an assessment to validate the valuation of the home, so the seller also has to make sure comparable houses are selling in the area for a fair period of time. They don’t want to sit several months in a house waiting for it to sell.
Out of Policy
The lender will understand the escape plan of the borrower, because that is how they will be paying back the debt. At the end of the short term there’s a balloon payment, so they want to be confident the borrower can pay for it.
If the developer wants to market the property by renovating it and selling it at a profit, the lender knows that once the homeowner sells it they will be compensated at the closing table.
If the borrower plans to refinance the property by the end of the term, the lender will want to be sure they will receive funding. The lender may not be as willing to lend to a poor borrower. In this situation, they should look more closely at the borrower ‘s credit and personal finances. In case the borrower can not pay the loan off at the end of the term, they may also need a higher down payment to reduce their risk.
Few hard money lenders also offer five- or 10-year terms on long-term financing on investment properties. They may be willing to do the in-house refinancing if the borrower satisfies the credit requirements.
Additionally, if the mortgage can not be refinanced on time, the lender could go into the loan with the intention of renewing the hard money loan. For the lender, this is not a terrible situation, because they will continue to get the high interest rate for another term.
Hard money lenders also look to the experience of the borrower. When they invest on a fix-and – flip property they like to see lenders who have completed at least a few other transactions.
Smaller lenders usually stick to their knowledge of markets and states that have a strong real estate market. Most of them, in rural areas, do not like land. We would typically only approve the loan with a lower loan-to – value ratio (LTV) if they do lend in rural areas. In rural areas, something like 50 to 60 per cent is normal.
Timetable for the loan funding
The benefit to hard money is the short time it takes for the loan to be repaid. Because the underwriting process focuses primarily on the value of the property, loans will in many cases be accepted within 48 hours.
A lot of private borrowers consist of a small group of investors and have a large pool of available capital. Commonly, once the underwriting is completed, the loan officer or underwriter will have to get permission from the creditors.
Hard money lenders don’t have customer deposits to finance lending, and the Federal Reserve can not borrow money. These are restricted by private investors to their own assets so they have to set aside money for each loan accepted. Otherwise, when it comes time to close, they might not have quick access to money.
The applicant demands an assessment until the loan is accepted. The loan will usually be repaid within a few days of the end of the valuation.
If everything moves fast and there are no unforeseen complications, a hard money loan can be approved in seven to 10 days, depending on how long the review takes. Compared to a traditional bank loan, that is extremely swift.
Several hard money loans are also now being financed by crowdfunding. The crowdfunding platform is investing, purchasing an assessment, rating it, and setting an interest rate. They then put it out for individual investors to fund portions of it on the platform. It may take longer to repay this type of loan, depending on how long it takes to get enough creditors to back it up.
Lenders with hard money to first time creditors
First-time investors may have more difficulty getting a loan to fund a contract. This is particularly true for fix-and – flip loans. In the case of an income property, the lender has no way of knowing whether the borrower is capable of managing the building, or managing tenants.
A few private lenders work only with experienced investors. To get accepted for a loan they need a borrower to have a minimum amount of successful deals under their belt. Usually they’ll require some kind of verification of previous investments.
They might want to see, for a change, the closing papers from the original purchase and sale. You will probably look for evidence for an income property that the creditor owns the property, as well as current income statements or tax returns.
Risks of loaning hard money
The lender isn’t the only one who takes a chance on loans for hard money. The high cost of borrowing hard money will make it difficult for them to pay back if the property being purchased isn’t as lucrative as anticipated. This could result in the creditor selling the property after spending all their money in it or going broke to pay it off fully.
There is always the possibility of a fraudulent investor working with him. Some lenders might use tactics such as “bait and switch.” Which suggests they’ll first offer decent deals and a small interest rate, but change the terms later. At the very last minute, they could even change the conditions, leaving the creditor with no alternative but to accept the new conditions or forfeit the contract.
Therefore, real estate investors should only work with lenders who have a good reputation and have reviewed all the loan documents and agreements. Many loan agreements can bind the borrower but at any point require the lender to change conditions or withdraw from the contract.
Anabel Uribe, a lending bureau with Investor Property Mortgage, is giving some advice to real estate owners to talk to hard money borrowers. “If you’re talking to a dishonest lender, it can sometimes be very obvious. If someone pitches a rate and a term to hook you up without scrutinizing the deal to some degree, that’s usually a bad sign. If a lender asks you a long list of precise questions before giving you a quote (in person or over the phone), then you’re most likely talking to a pro.”
Uribe also provided a list of questions a lender should ask a real estate investor:
- How long did you go into business?
- Which kinds of transactions do you most frequently finance?
- What time to close a conservative turnaround?
- Are there any other “junk” fees associated with this loan outside of the ratings, collection, and underwriting?
- Will the payments have to be charged directly or bundled into the loan?
- If the payments can be paid up front, is there room for lower interest rate negotiations?
You might also want to consider using a credit broker to get your hard money loan. Lots of time is spent by trustworthy brokers building relationships with direct lenders. They have worked with enough to know who to trust, too.
Also, a broker can connect you to the right lender based on the type of property, the amount of the loan, your experience and the market in which you are. You’ll probably get better offers on loans dealing with a lender who ‘s comfortable with your type of deal.
Brokers will help prepare the documents needed to send to the lender. Having the right paperwork to immediately send to the lender will help you get the permission and speed up the process.
Using a broker may however come at a cost. When a broker is involved, certain borrowers may lower the origination fee, so the broker may charge their own fee. The fee for a broker can range from 1% to 4%, depending on the size of the deal. Generally the rate for larger loans is on the lower end.
If a broker can get you a lower interest rate, however, that could be a good investment.
Five best lenders on hard money
Those hard money lenders have the industry’s best reputations. Compared to other borrowers in the market, they have fair terms and they have been able to close deals easily without changing their last minute terms.
The Industry’s top five hard money lenders are:
- RCN Capital.
- Lima One Capital.
Review loan amounts, interest rates, terms, minimum credit scores, and time for our top five hard money lenders to close.
RCN venture capital
RCN Capital is a nationwide lender offering hard money loans for fix-and-flips, rental properties, and multi-family real estate. We also do long-term rental loans, which lenders with hard money can apply for at the conclusion of their lending term.
|MAXIMUM LOAN AMOUNT||$2.5 MILLION|
|LTV||Up to 90% for fix-and-flips Up to 75% for rentals Up to 80% for multifamily|
|Terms||12 months for fix-and-flips 24 months for rentals 12 months for multifamily|
|Minimum credit score||600|
|Days to close||10+|
CoreVest offers a wide assortment of loan products. In addition to bridge loans for fix-and-flips, they do provide credit lines, long-term mortgage debt, residential property loans, build-to-rent loans, and multi-family loans.
|MAXIMUM LOAN AMOUNT||$50 MILLION|
|LTV||Up to 90%|
|Terms||12 to 24 months|
|Minimum credit score||620|
|Days to close||15+|
One capital city of Lima
In addition to hard-money lending, Lima One Capital offers numerous credit options. We do have plans for long-term residential loans and multifamily loans.
|MAXIMUM LOAN AMOUNT||$5 MILLION|
|LTV||Up to 70%|
|Terms||13 to 24 months|
|Minimum credit score||620|
|Days to close||15+|
Groundfloor is a short term lending provider with crowdfunding. Groundfloor funds the deals they approve, then puts the loan on its investor platform to fund and reimburse Groundfloor.
|MAXIMUM LOAN AMOUNT||$2 MILLION|
|LTV||Up to 70%|
|Terms||3 to 6 months|
|Minimum credit score||620|
|Days to close||15+|
LendingHome is one of industry’s most well-known hard money lenders. They also offer long-term loans for rented properties. LendingHome has options to invest passive income in its loans for accredited investors.
|MAXIMUM LOAN AMOUNT||$5 MILLION|
|LTV||Up to 90% Up to 85%|
|Minimum credit score||620|
|Days to close||5+|
The starting line is
Hard money loans can be an excellent tool to purchase assets in specific situations for real estate investors. Nonetheless, where available, they should not be used instead of traditional financing. When you plan to fund a hard-money contract, make sure that you can afford interest and fees so that you can pay off the loan when it is due. If a hard money loan is right for your case, make sure to check out the best hard money lenders on our list of companies.
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