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Real Estate Investors seek Alternative Financing as Banks tighten up Lending Criteria amid Economic Slowdown

A hard money loan is a short-term asset-based loan secured by real property. Hard money loans are underwritten and funded by private investors, family offices, REIT’s, and institutions looking for higher yields as opposed to conventional government backed lenders such as banks. The terms are usually around 12 to 36 months with a case by case basis up to 30 years. The typical structure involves monthly payments of only interest with a balloon payment at the end of the term.

The loan amount offered by the hard money lender is dependent on the loan to value ratio. Hard money loans are used primarily by real estate investors who need to close quickly in order to secure a property or borrowers who need to refinance but do not have full income documentation that conventional banks require.

Hard money lenders are focused on what the property’s value is versus what the borrower’s credit or income is. When borrowers cannot obtain bank financing due to a Lis pendens, foreclosure, short sale, bankruptcy, or other negative credit event then a hard money loan is a great solution on investment properties if they have sufficient equity in the property being purchased or refinanced.

What types of Properties are Hard Money Loans used for?

A borrower can get a hard money loan on almost any type of property including but not limited to single-family residential (SFR), multi-family, mixed-use, residential developments, commercial, office, retail, warehouses, industrial, and even vacant land.

In fact, many hard money lenders have expanded into multiple asset classes involving multiple states particularly Florida, Texas, Georgia, New York, New Jersey, Tennessee, Massachusetts, and Washington D.C.

Many hard money lenders will not lend on owner-occupied residential properties due to consumer protection guidelines from Dodd-Frank, RESPA, and TILA so as a borrower you will need to show that the property is for “business or investment purpose or use” and not to live in as a primary residence. To do this a borrower will need to provide a copy of his driver’s license, utility bill, or bank statement showing their primary address in which they reside.

What Types of Situations Should Hard Money Loans Be Used For?

Hard money loans are not appropriate for all deals rather are best used when purchasing or refinancing investment properties in a short period of time. If a borrower has good credit, income documentation, and enough time to qualify for conventional financing through a bank or credit union then it may be worth exploring that option first. However conventional banks often have a very lengthy approval process which can drag on for weeks even months. Therefore, even strong income and high credit borrowers choose to close with hard money loans for peace of mind, speed, and efficiency.

Hard money loans are great for transactions involving:

  • Fix and Flips
  • Rental Investment Properties
  • Offices
  • Retail
  • Ground Up Construction
  • When a real estate investor must close quickly
  • When a borrower has low credit or cannot document income
  • Un-Stabilized or Unrenovated multi-family or investment properties

Who Should Use a Hard Money Loan?

Real estate investors choose to use hard money lenders for a variety of reasons. The main reason is the ability of the hard money lender to fund the transaction in less than two weeks versus up to 2 months in conventional financing. The application process for a hard money lender is a simple as filling out a loan application, providing identification, and ordering a property valuation. The hard money loan can be approved in as little as one day!

A main reason a borrower may choose to use a hard money loan is that they have been denied financing from a bank or another conventional lender. Banks put strong emphasis on the borrower’s documented income and the borrower’s ability to maintain that income in the future. If the borrower has taken a pay cut, changed jobs, moved locations, or recently has been laid off then the bank may reject the loan due to failing to meet the “ability to repay” standard. Whereas a hard money lender will look past those issues and focus primarily on the loan to value of the property.

What are the typical Interest Rates and Points for Hard Money Loans?

The interest rates and points charged by hard money lenders will vary from lender to lender, but they typically range from 1.50% – 5.00% with rates from 7.50% to 12.00%. For example, hard money lenders in coastal states such as Florida, Texas, and California generally have lower rates than other parts of the country since there is stronger competition in those states.

The reason the rates are higher on hard money loans is that hard money lenders take on more risk since they are not underwriting the borrower’s income and ability to repay the loan. Due to this higher risk, the reward must be higher for the lender or investor making the loan.

What is the typical Hard Money Loan to Value Ratio?

The primary factor hard money lenders use when underwriting the loan is the ratio of the loan amount to the subject property value. This is described as “loan to value” otherwise known as “LTV.” Many hard money lenders will lend up to 65% of the current value of the property. However, some hard money lenders such as Capital Funding Financial lend up to 80% of the current value when certain requirements are met. Additionally, hard money lenders will lend on “fix and flip” or properties needing renovation based on the after- repair value (ARV) which is the estimated value of the property after the borrower has completed its repair budget.

Some lenders such as Capital Funding Financial will lend at a 75% LT-ARV (“loan to after repair value”) when it comes to experienced investors. This is done by funding the initial purchase up to 85% and establishing a renovation fund which will be released in draws to the borrower to complete the renovation on the property. In this case, Capital Funding Financial lends 100% of the rehab budget for real estate investors. This allows real estate investors to save capital and preserve their liquidity while working on the property in order to get it “rent ready” or sell it.

Borrower Requirements for Hard Money Loans

As discussed earlier, hard money lenders are primarily concerned with the amount of equity the borrower has invested in the property that will be used as collateral. They are less concerned with the borrower’s credit rating. Issues on a borrower’s record such as a foreclosure or short sale can be overlooked if the borrower has the capital to pay the interest on the loan.

The hard money lender must also consider the borrower’s plan for the property. The borrower must present a reasonable plan that shows how they intend to ultimately pay off the loan. Usually, this is improving the property and selling it or obtaining long-term financing later.

Finding a Hard Money Lender to Work With

There are many different ways to find a reputable hard money lender to work with. One easy way to find a local hard money lender is to search Google. Alternatively, local real estate investment meetings have local private money lenders that work with these groups. These club meetings exist in most cities such as BREIA (Broward County Real Estate Investors Association) and are usually well-attended by hard money lenders looking to network with potential borrowers. Other recommendations can come through Real estate brokers, mortgage brokers, and other real estate professionals. One the fastest and most highly rated hard money lenders in America is Capital Funding Financial which is backed by a local family office fund in Florida. Capital Funding Financial offers investors the ability to close a loan in 3 to 7 days without a minimum credit score, income documentation, or even an appraisal in many cases.

Conclusion on Hard Money Loans

Hard Money Loans are a great tool for any investor looking to fund a future real estate transaction quickly without all the hassle of trying to obtain bank financing. The higher rate may appear daunting at first to a novice investor, but experienced investors know the value of being able to secure properties from Sellers at much lower prices when offering “cash” with a hard money investor backing the project. The initial costs are far outweighed by the return on investment when the project is completed. When looking for a hard money lender to partner with consider Capital Funding Financial which is a nationwide direct lender with aggressive rates, great service, and tons of experience helping real estate investors with their rental properties, fix and flips, and commercial transactions.

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