Hard Money Loans Are a Valuable Tool for Investors. Here Are Advantages and Disadvantages of Using a Hard Money Lender To Get Your Deals Quickly Funded and Closed.
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Hi, this is Frank Chen with REIClub.com, the only site you need as a real estate investor. Today I’ve got a quick video on what you need to know about Hard Money Loans.
What is it?
Hard money loans are short term, high fee, high rate loans that allow a real estate investor to purchase rehab projects quickly and easily, that the investor might not be able to purchase otherwise through traditional lenders.
Historically, hard money loans were purely equity-based, meaning loan approval rested on the details of the deal and the property. However, due to losses suffered, the industry moved toward requiring decent credit scores and down payments to reduce their risk.
Why use it?
– easier to qualify – asset based, credit and capital are secondary
– shorter term loans
– quick close – make all cash quick close offers, close much faster than traditional lender
– buy junkers – traditional lenders won’t loan rehab projects, able to add funds for repairs to loan
– Qualify for higher loan amounts
– Can be used to for interim financing
– points – Additional up-front percentage fee based on loan amount
– rates – monthly interest associated with loan amount – 12-18%
– payments – usually monthly interest-only payments, possibly accrued – monthly interest added to principal
– length – term of loan usually 6-12 months
– LTV – usually max out at 65% to 70% After Repaired Value (ARV)
– repair draws – HMLs can fund repairs. HMLs require a “Draw Request” form to be filled out to identify the completed repairs to the property, Copies of the invoices from the vendors. Then, hard money lender will increase loan amount to pay contractors once the work is inspected-HMLs do not pay in advance for any work.
Qualifying – underwriting criteria
– property has to have significant equity – ARV
– credit score – required – 600-650
– cash on hand – 5% – 10% of loan amount to cover payments, expenses, if you cannot afford to make monthly interest payments you typically cannot afford to take out this type of loan.
– down payment – skin in the game, percentage varies by lender, but 10% not uncommon
– minimum loan amt – regardless of buying cheap properties, some lenders require min loans
– paperwork – usually much less paperwork than regular loan
How to find?
– Real Estate Clubs – HML’s frequent clubs, other investors
– Internet Searches
– Title Companies / Closing Attorneys
Bottom line: Although Hard Money Loans are relatively expensive in terms of fees, interest rate, etc. these loans allow real estate investors to make all cash, quick close offers and to stay in the game for short term rehab deals. If the investor’s short term exit strategy does not work out, the investor can place longer term financing on the property to reduce operating costs.
Again, this is Frank Chen with REIClub.com. Please take the time to leave your comments for this video below and please subscribe to our YouTube channel so you’ll be automatically notified when we upload more quick video tips for you. Take care and good investing.