"What Are Hard Money Lenders"
What is Hard Money?
Hard money is a way to borrow without using traditional mortgage lenders. Loans come from individuals or investors who lend money based (for the most part) on the property you’re using as collateral. When loans need to happen quickly, or when traditional lenders will not approve a loan, hard money may be the only option. Let's review how these loans work.
What is a Hard Money Loan?
A hard money loan is simply a short-term loan secured by real estate. They are funded by private investors(or a fund of investors) as opposed to conventional lenders such as banks or credit unions. The terms are usually around 12 months, but the loan term can be extended to longer terms of 2-5 years. The loan requires monthly payments of only interest or interest and some principal with a balloon payment at the end of the term.
The amount the hard money lenders are able to lend to the borrower is primarily based on the value of the subject property. The property may be one the borrower already owns and wishes to use as collateral or it may be the property the borrower is acquiring.
Hard money lenders are primarily concerned with the property’s value rather than the borrower’s credit (although credit is still of some importance to the lender). Borrowers who cannot get conventional financing due to a recent foreclosure or short sale can still obtain a hard money loan if they have sufficient equity in the property that is being used as collateral. When the banks say “No”, the hard money lenders can still say “Yes”.
Why Use Hard Money?
If hard money is expensive, why would you use it? Hard money has its place for certain borrowers who cannot get traditional funding when they need it.
Speed: because the lender is mostly focused on collateral (and less concerned with your financial position), hard money loans can be closed more quickly than traditional loans. Lenders would rather not take possession of your property, but they don't need to spend as much time going through a loan application with a fine toothed comb – verifying your income, reviewing bank statements, and so on. Once you have a relationship with a lender, the process can move quickly, giving you the ability to close deals that others can’t close (that’s especially important in hot markets with multiple offers).
Flexibility: hard money agreements can also be more flexible than traditional loan agreements. Lenders don't use a standardized underwriting process. Instead, they evaluate each deal individually. Depending on your situation, you may be able to tweak things like the repayment schedules. You might be borrowing from an individual who’s willing to talk – not a large corporation with strict policies.
Approval: the most important factor for hard money lenders is collateral. If you’re buying an investment property, the lender will lend as much as the property is worth. If you need to borrow against a different property you own, that property’s value is what the lender cares about. If you’ve got a foreclosure or other negative items in your credit report, it’s much less important – some lenders might not even look at your credit (although many lenders will ask about your personal finances). Most hard money lenders keep loan-to-value ratios (LTV ratios) relatively low. Their maximum LTV ratio might be 50% to 70%, so you'll need assets to qualify for hard money. With ratios this low, lenders know they can sell your property quickly and have a reasonable shot at getting their money back.
Pros and Cons of Hard Money Loans
Depending on your situation, a hard money loan can be a helpful tool or it can be a costly mistake. Most experts agree that hard money loans are a short-term solution, not a replacement for traditional mortgages.
Pros
- Accessible to people who have equity but are not eligible for traditional loans.
- The money is available quickly, usually within two days.
- Hard money lenders usually do not require credit checks or financial disclosures.
Cons
- The interest rates are much higher than conventional loans.
-The processing fees are costly, up to three points or more.
-There are usually pre-payment penalties for paying off the loan early.
-The down payment requirement is large, usually 30 percent or more of the total value of the loan.
Finding a Hard Money Lender to Work With
There are many different ways to find a reputable hard money lender. One easy way to find a local hard money lender is to search Google for [your area] + “hard money lenders”. There will be individual companies in the search results as well as lists of hard money lenders compiled by others. This will provide a good amount of lenders to begin contacting and evaluating.
Another way to find a hard money lender is by attending your local real estate investor club meeting. These club meetings exist in most cities and are usually well-attended by hard money lenders looking to network with potential borrowers. If no hard money lenders are present at the meeting, ask other real estate investors if they have a hard money lender they can recommend. Real estate brokers, conventional mortgage brokers and other real estate professionals may be able to refer an experienced hard money lender. Leverage your existing network and see who is most recommended.
Once a list of a few lenders has been compiled, it’s time to start contacting them and finding the most suitable lender to fund your next deal.
Bottom Line
To borrow money, you’ll need to get connected with investors. To do so, find out who in your area lends money based on collateral. Local real estate agents and real estate investor groups are a good source for names. Reach out to a few lenders, discuss your needs, and develop a relationship so that you can fund projects quickly and easily when the time comes.