Hard Money Loans for Homeowners Who Need Emergency Money

Hard Money Loans for Homeowners Who Need Emergency Money

Traditional mortgages are typically for terms of between 15 and 30 years. You may have qualified for the loan when you first bought your house, but along the way you hit a few bumps. This happens to everyone, but if you are in jeopardy of foreclosure, hard money loans may help you bail out of trouble until you can get back on your feet again. Unlike traditional loans that use your creditworthiness to determine whether they will lend you money, hard money lenders use your house as an asset to back the loan. The amount of loan that you can obtain is based on the value of your home and the equity in it. These are often called bridge loans, because they can help you bridge the gap between your current crisis and the time when you can once again qualify for a traditional mortgage.

Borrowers Behind on Their Mortgage

For borrowers who are behind on their mortgage, a hard money loan, or private loan, can be used as a tool to refinance your home quickly. The original loan is paid off with the hard money loan. Then, you can refinance to get better terms when your financial situation improves. This is one way to save your home from foreclosure risk. They often work in a specific geographic area, because they are familiar with the housing market and the potential to turn around the investment, if this loan to should go into default.

Borrowers Who Need Repairs 

Sometimes things occur that cannot be helped, such as natural disasters. Roofs and foundations eventually wear out. Large ticket items such as these are often beyond the capabilities of many homeowners to fix due to a lack of cash. This is another circumstance where a hard money loan can be a lifesaver. There are many reasons why you may not qualify for a conventional loan if your house needs repaired, other than poor credit. For instance, you may have multiple mortgages and no longer qualify for any additional mortgages.

If the value of your home has decreased, conventional lenders may not be willing to give you additional financing. Hard money lenders may consider the value of the home after repairs are made as the factor on which to base the loan. Hard money lenders can be the perfect solution for homeowners who need to make costly repairs and need cash fast.

Owner-Occupied Homes vs. Investment Properties 

Some hard money lenders will not allow loans for owner occupied homes. These companies will only finance loans for investment properties. The reason for this is that they must comply with federal and state laws that are not necessary for investment loans. These laws are in place to protect the homeowner from predatory lenders. They are designed to give the homeowner the best possible chance for being able to remain in their home, while obtaining the financing that they need.

When financing homes that are owner-occupied homes, the payment must include escrowed property taxes and insurance. This is to prevent these amounts from accumulating and risking the loss of the property for unpaid taxes. With owner occupied loans, the borrower must also demonstrate the ability to repay the loan. In the case of investors and homes that are not owner-occupied, the equity is often enough. Owner-occupied loans cannot be made based on the equity of the home alone. The last requirement for making an owner occupied hard money loan is that the borrower must complete a consumer credit counseling class before signing the final loan paperwork.

Loans for owner occupied homes take longer to close on than those for investors. Borrowers must be aware that the interest rates are higher than for conventional loans, but the repayment time is shorter. In a crisis, this can be a solution for staying in the home, rather than losing it to foreclosure. However, this is a risky strategy and one must be certain that they will be able to repay the loan on time. Otherwise, a borrower could find themselves in even greater trouble than before.

Private money loans can be a solution for homeowners who need fast cash for repairs, or to provide a temporary solution due to a job loss, unexpected hospital stay, or other circumstances that can cause them to become behind on their conventional mortgage. They are not meant to be a long-term solution, but a temporary solution to buy more time until they can get back upon their feet. It is important to consider all options before seeking a hard money loan in this situation. It is always best to try to work with the original lender and try to work out a solution, but if this is not possible, a hard money loan may be the best option.

 

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What does loan term mean

Real estate financing often uses industry jargon and terminology that some applicants are not familiar with. Regardless of the type of real estate loan that you are interested in applying for, you understandably need to understand all loan terms, conditions and more related to your loan. Residential and commercial properties may be among your most expensive assets, and this means that real estate loans likely are among your most substantial debts. You must understand what the terms of your real estate loans are so that you can make informed decisions about using and managing this debt properly.

One of the more common industry phrases that you may come across when applying for any type of loan is a loan term. This phrase actually has two primary meanings, and a closer look at these meanings will help you to manage your real estate financing in the months and years to come.

What Is a Loan Term?
Generally speaking, loan terms describe all parameters for a loan. This broad term may include the loan amount, interest rate, specific term length, amortization, prepayment penalties and more. On a more specific level, the term of a loan describes how long the lender will extend the loan to you. For example, a common term length for conventional residential loan is 30 years. This means that the lender is giving you 30 years to repay the balance. With this and most types of real estate loans, monthly loan payments are expected to be made over the full length of the loan term.

What Are Common Hard Money Loan Terms?
Now that you know more about what a loan term is, you may be wondering what kind of loan term you should expect when applying for a hard money loan. Be aware that hard money loans are short-term real estate loans. All aspects of general loan terms for a hard money loan are determined by the lender based on a review of the specific merits of the loan request. Generally, you can expect a typical hard money loan to extend for approximately 12 months. However, there is considerable fluctuation in this from lender to lender and from loan to loan. In addition, many lenders offer the ability for the loan to be extended with minimal effort required. Some extensions can last up to three to five years.

Most residential loans that you are familiar with are fully-amortizing. This means that the entire loan balance will be repaid in full over the term length. At the end of the loan term, there is not a balloon payment or any remaining balance owed. Hard money loans are usually different. After all, it is not reasonable to expect a borrower to repay the full loan balance within a 12-month period. Many hard money loans are interest-only. This means that no principal is repaid. Some hard money lenders have a large balloon payment due at the end of the loan term.

Because of this common aspect of hard money loans, borrowers need to have an exit strategy to deal with the end of the loan term. In addition to the possibility of extending the hard money loan, the other options are to refinance into a permanent loan or to sell the property. Being aware of the loan term and the loan due date is essential in order to avoid unnecessary issues with your hard money loan.

How Do You Determine the Exact Loan Term?
With a typical hard money loan term spanning from 12 months to several years in length, you understandably may need more specific information before you decide to move forward with a full loan request and application. Hard money lenders typically do not issue firm loan terms until they have reviewed a detailed loan proposal. This loan proposal may include costs to develop or rehab the property, a timeline for the completion of the work and more. Hard money lenders know that you likely cannot obtain permanent financing in the middle of a major rehab project, and they typically will customize the loan term around the specific details of your scenario.

It is understandable that you would not want to devote a substantial amount of time and energy preparing a loan submission if a lender cannot give you the loan term length that you desire. However, you can see that it is not possible for this type of lender to give you specific details about the term length or any other loan parameters without learning more about the scenario. If you are interested in obtaining specific terms for your potential hard money loan, spend time preparing a detailed package that can be submitted to a few lenders. When you take this important step, you can easily shop your loan request around to locate the best terms available for your needs.

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Hard Money Appraisal

As a real estate investor, it’s critical to know what a bank will appraise a property for once it’s been developed. Poor, or aggressive, appraisals can kill your project. If your strategy is to fix and flip, then an appraisal is necessary in order for the hard money lender to know how much the property is worthy.

Most hard money lenders give loans based on the after repair value – which means they’ll give you a 60-70% LTV, based on this value. It’s important that the appraisal by the hard money lender be aligned with the appraisal from the buyers lender. Even though a hard money lender might appraise your property at a higher value – what ultimately matters is what the buyer’s lender appraises it at.

For example, if a hard money lender appraises your property at $140k – but the seller’s lender appraises it at $120k, the difference is $20k will bite you (the developer).

Why do hard money lenders want an appraisal?

Hard money lenders rely on appraisals, because they are lending based on the value of the property. They are giving you money – not because of your capability to repay the loan — but because the value of the property far exceeds the loan they are giving you. As a result, if you default on the hard money loan, they can take possession of your property and sell it.

Appraisals are an opinion provided by licensed appraisers. It provides information on sold, pending, and active, comparable properties, and photos and relevant info on those properties. This is different than a Broker Price Opinion – which is a real estate broker’s assessment of value. This is a much shorter report – normally 1-2 pages long. You have to be careful with BPO’s because the value you get is only as good as the broker.

Once you have your appraisal, you can request for another appraiser to review the appraisal you received. Any hard money lender will look for an appraisal before giving you a loan. Without an appraisal done, you should not spend time speaking to a lender.

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ARV – After Repair Value

Are you looking for hard money, in order to flip houses, or other commercial real estate? Regardless of what you’re planning on doing, there’s several things you need to know about. For example, how much work does the property need? Is it in a good neighborhood? What will the property be worth once the rehab/construction is finished?

Once of the key variables when looking for a loan, is ARV – or after repair value. This is an estimate of what the property is worth once all the rehab has been done on the property. The ARV is one method a hard money lender determines if the investment is a good idea or not. The investor will use ARV to determine how profitable the deal will be. The ARV is something which is determined by looking at the amount of rehab into the property, and by looking at similar properties in the neighborhood who had appraisals done.

ARV % 

Most investors who look for hard money loans, can get up to 70-80% of the ARV. Anything above 70% is typically considered risk, for hard money lenders. ARV is calculated by the dividing the loan amount by the ARV. For example, if your loan amount is $175k and the estimated ARV is $250k, then the loan to ARV will be 70%.

If you’re considering flipping house, rehabbing commercial property, or whatever else – then we can help you. Delancey Street is a private lender, that has many years of experience helping real estate developers get access to hard, and reliable, cash.

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How do I request a draw?

In the world of commerce, hard money loans are in common use to spur the expansion of the economy. These particular forms of loans are typically provided by private investors who put forth funding in the interest of real-estate operations. These types of loans are typically associated with construction, and they come with their fair share of risks. With such large quantities of money at stake, it is uncommon for lenders to hand over the volume of the entire loan right off the bat. A frequent occurrence in the world of borrowing on a larger scale is the request for a draw in the management of a hard money loan.

How Exactly Does A Draw Request Occur?

A draw occurs when funds from the construction budget of a loan are allocated toward the material suppliers and contractors necessary to put developments into effect. The contractor has the capability to issue draw requests when it is appropriate. These take place as a result of a sort of agreement between the contractor and the hard money lender. Once the builder is on the same page as the source of funding, progress can be made and construction will continue. While the contractor is the one who issues the request in the context of a draw request, the terms have usually been settled with the hard money lender prior to the occurrence of the request.

In terms of the literal form, there is no universal draw request form, but they usually tend to have similar layouts. Countless templates exist across the Internet and professional world. The general content includes lines for verification information such as signatures and dates. More notably, the amount requested is the main item to fill out on a draw request form. Often, the contractor lists an explanation to provide more validity to his request. 

At its core, a draw request is a form that serves as documentation of completed repair work. Contractors may give copies of this form to sub-contractors and other affiliates, but it is completely necessary that the document is submitted to the hard money lender of the operation since it is ultimately his money that is going to the spent. After this has occurred, the lender reviews the draw request and decides whether to issue approval. The approval of a draw causes a commotion of activity since the approval process is heavily involved, and the funds must be transferred swiftly in order for the procedure to run smoothly.

In What Forms Can I Request A Draw?

There are two main ways to establish the intervals by which the lender is to release draws. Some draws happen upon the completion of designated stages, which serve as progress thresholds in the creation of the building. This system places an incentive on the contractor to make progress in order to maintain a steady flow of funds. The other method is to release draws on set intervals of time. 

It is common for planning to precede the request of a draw since the affair can have quite a sizable impact on the state of the loan and the construction. The contractor of a project is likely to put a substantial amount of care into the formation of a draw request, making sure the subtle details are without error. While merely a piece of paper from a fundamental standpoint, a draw request has an important role in the lending industry that should be taken notice of. More often than not, draw systems are somewhat agreed upon before the issuing of the request, so operations may occur smoothly from that point.

Closing Statement

From an economic standpoint, having a firm grip on the process of draw requests is important to the overall understanding of the hard money loans they occur under. The request of a draw can be the driving force that boosts a project closer to completion or contrarily hinders its continued erection. The proper treatment of a draw request or lack thereof can sway the path of a business venture. The dynamic between hard money lenders and contractors in relation to draw requests is the basis of much of a building’s construction process and should not be overlooked as an unimportant detail of an investment project.

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Can a borrower use hard money to purchase a property for the land and build a new home on it?

Hard Cash Loans and Personal Home Building

Purchasing land and building homes are dreams that many people hold dear. Unfortunately, the current economic climate in many areas has produced a class of potential homebuyers who have less than average credit scores. This situation has rendered such people unable to obtain sizeable loans from large institutional lenders like regular banks.

In order to fill in the gaps and serve individuals with less than perfect credit records, special lenders known as hard money brokers provide high-interest loans. These hard money loans may be used for many purposes, but those who plan to use these cash advances for personal home construction may face unusually large future mortgage payments.

Hard Cash Loans: The BasicsHard money is a term for cash loans that brokers provide to people who cannot access mainstream credit markets. These lenders are professionals who often hold real estate brokerage licenses.

The various states regulate the hard money brokers that live and operate in their jurisdictions. These brokers may have relationships with banks or with private investors who are capable of providing sizeable loans in short periods of time.

Because hard money lenders work with businesses and individuals who have credit issues, they usually require loan applicants to put up some forms of collateral. This collateral often takes the form of land or property that may be owned or controlled by borrowers. In addition, lenders may charge loan recipients higher than average fees, as well as interest rates in the double-digits.

Upon receiving loan requests, hard money brokers raise the requisite funding from investors. After assessing the proposed construction projects and settling on loan terms, these brokers then provide funding to loan recipients for their developmental needs.

Hard Money Investors and Their RequirementsHard money investor are often private individuals who are willing to back risky projects. Due to the higher than normal risk of their endeavors, many investors and brokers require borrowers to pay unusually large interest rates. In addition to this, most hard loan contracts stipulate that loan recipients may be required forfeit their properties if they default on their loans.

These high costs make hard cash loans attractive to land developers or property flippers who plan to turn rapid profits. Hard funding can also act as valuable safety nets for homeowners who need emergency assistance to prevent foreclosure proceedings.

Notes for Hard Money BorrowersHard money loans are attractive options for people who have viable construction projects. While they can be easy and rapid to secure, they also present real risks that borrowers should be fully aware of before going ahead with their hard cash deals.

State and federal laws closely regulate mainstream loans that are provided by banks. These regulations require banks to carry large amounts of insurance to protect their customers. Unlike these banks, hard money brokers may not be required to carry the same kinds of insurance, and this can leave borrowers in precarious situations if loans go sour.

Hard money loans also come with very high-interest rates attached. Since these loans often deal with real property deals or construction projects, loan applicants often need to borrow large sums of cash for down-payments and other property development costs. The sheer size of these loans coupled with their unusually heavy interest rates may force borrowers to consistently come up with large, resource stretching loan-service payments.

Given these factors, borrowers of hard money loans often use their funding to pursue real estate project of commercial natures that offer high expected rates of return. Some examples of common uses for hard money loans include place-holder downpayments as well as funding for buy-and-flip renovation projects.

Should Borrowers use Hard Cash for Home Building?The main point for prospective hard money borrowers to remember is that these loans are almost always backed by land or real property as collateral. As such, people who obtain hard money loans in order to buy land for the construction of their personal homes would likely need to use such land, or other real estate holdings, to secure their loans.

Therefore, while it is technically possible for individuals to use hard money loans for home construction purposes, they would need to have solid repayment plans in place in order to prevent foreclosures. For this reason, many who choose to buy development land with their hard loans use their land or their buildings for commercial purposes.

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