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 have little money or for those who have
credit challenges 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.
Now that you know a little more about hard money and how it works,
you can make an educated decision if you want to go this route.
You should have received a list of hard money lenders when you
first joined this newsletter. Understand there are several out
there. It is a good idea to shop for the best one to fit your
needs. Then you can establish a long term relationship with them.
If you use them once and everything went smooth, you will more than
likely use them again.
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