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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What happens in the event that a mechanic’s lien is filed on a property?

A hard money loan is a special type of short-term financing that is secured by real estate. This could be either a residential or commercial property. Hard money loans typically need to take the first position on the property, and many do not allow any type of secondary claim on the property. For example, you cannot usually take out a second lien on the property when a hard money loan is in place. 

You may be aware that a mechanic’s lien is linked to the property that you want to buy or is tied to a property that you are refinancing with a hard money loan. Understandably, you want to know how your hard money lender will address this lien or if it will simply be overlooked. A mechanic’s lien on a property does require special handling, but it can usually be addressed properly with a few easy steps.

What Is a Mechanic’s Lien?
A mechanic’s lien is typically filed by a contractor who has worked on the property in the past. This could be a roofer, a plumber, an architecture, an appraiser or anyone else who performed services specifically related to the subject property. A lien indicates that they completed work on the property and have not gotten paid within a reasonable period of time despite multiple requests. Liens are filed against a property to ensure that the contractor eventually does receive funds that are due. However, the lien can remain in place for years until action is forced on the property owner. This usually occurs when the property owner sells or refinances the property. A mechanic’s lien or any other type of lien against a property usually takes first position in terms of claims against a property. This means that a free and clear title cannot be conveyed until the lien is paid off. 

In some cases, the payment situation is an oversight, and the property owner is more than happy to pay the amount due. However, in many cases, the lien is the result of a dispute between the property owner and the contractor. For example, the property owner may not be satisfied with the quality of the work or materials, but the contractor may state that the work has been completed as agreed. When the matter is disputed, it may still be a legal issue that is outstanding, or the property owner may refuse to pay the lien as a matter of principle. 

How Does the Lender Know About Liens?
If you are aware of a mechanic’s lien filed against a property, you may wonder how a lender would know about the lien. The lien may show on your credit report, but the credit report may not indicate which property the lien is tied to. Some lenders, including hard money lenders, may require are all liens, judgments and collections showing on a credit report to be paid off before the loan closes. Other lenders may overlook these factors provided that the lien is not on the subject property. 

A lien is filed against the title of the property. This means that the tile company will determine if any liens are filed against the subject property when doing its research. The lien will be listed in the title commitment as an exception against title. Hard money lenders and all other real estate lenders that need to take first position against the property will require the liens to be paid off prior to or at closing. Essentially, they need a clear title on the property before they can secure the property with their own loan. 

How Are These Liens Released?
Releasing a title loan can sound like a major ordeal, but it usually can be handled relatively stress-free. As long as the property owner is agreeable to paying this debt, the payment may be made at closing in some cases. However, in some locations, the lien must be paid prior to closing so that the release of lien paperwork can be properly filed and certified ahead of time. The title company can usually assist you with this process, but you may need to actually pay the judgment or lien through the court or entity where the lien was filed. Be aware that you may not be able to obtain any type of secured financing on the property until the lien is paid off. 

A mechanic’s lien on the subject property can be a delay in the overall loan process, but it is usually an issue that can easily be addressed if the property owner is agreeable to paying the lien. If the property owner is not agreeable to paying the amount owed in full, the loan process can come to a standstill. For more specific information about how your lender and title company will handle a mechanic’s lien in your location, contact them directly.

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What if I would rather handle the work myself?

One of the most common reasons why hard money loans are selected over bank loans is because of the unique nature of the scenario. Traditional bank loans are typically used for run-of-the-mill loan requests and permanent financing needs. For example, these loans are used when a buyer wants to hold onto the property for several years or more and when the property is already in good condition. A hard money loan, on the other hand, is a short-term loan that is most commonly used to reposition the property in some way. One of the more common repositioning tasks relates to renovations. 

A well-executed renovation may increase the property’s value substantially. If it is an income-producing property, the renovations may also enable the property to generate higher levels of income. If you are looking at ways to bolster profits from your upcoming real estate renovation project, it may have crossed your mind to complete at least some of the work on your own. After all, if you can eliminate labor costs from the total renovation budget and complete the same caliber of work, you could potentially save thousands of dollars or more throughout your renovation project. Before you follow through with this plan, spend time learning more about lender requirements and thinking through all aspects of this possible renovation plan. 

Your Lender’s Requirements
When a hard money lender is providing you with funds to renovate a property, the lender usually wants you to contract with an approved, licensed contractor to complete the work. Documentation showing the contractor’s experience, license and insurance may even be required as part of the loan approval process. Each lender is different, and there are no hard and fast rules in the hard money lending world. Some lenders may be agreeable to letting you complete at least some of the work yourself, such as demolition or landscaping. However, most lenders will only let you take draws that are based on specific contractor quotes. Some will actually pay the contractors directly rather than run the funds through you as a conduit. If you plan to do any of the renovation work on your own, discuss this option upfront with a few lenders so that you can select a hard money lender that allows it. 

Your Skills and Experience
Remember that work must be completed to code in many cases, and you may also need to obtain a permit. Some lenders specifically require you to use a licensed, experienced contractor to ensure that these criteria are met. However, if you are a skilled contractor by trade, some lenders will allow you to complete the work yourself. You may need to document your experience and prove that you are properly licensed and insured according to local requirements. Some lenders will also conduct a walk-through of the property or need an inspection after the work has been completed to ensure that the work has been completed properly. 

The Issue of Timing 
Remember that a hard money loan is a short-term loan. Contractors can typically complete quality work in less time. When you do the work on your own, you may have a one-man team, and this could slow down the progress of the project. You also may not be able to focus on the renovations as well as a full-time professional and his or her crew could. You must complete the work on your property within a specified period of time, and you must leave ample time for your exit strategy to be implemented. Common exit strategies for hard money loans are to refinance the property into a permanent loan or to find a buyer. Both of these processes cannot begin until the work is completed. In addition, both processes can take at least a few months of time to complete. A hard money loan typically has a balloon payment due at a specific date. While some extensions are possible with select lenders, this should not be your primary plan to rely on. Because timing is critical with a hard money loan, it may be best to let a contractor work on at least some of the project. This is, of course, if your hard money lender lets you complete the work on your own. 

It seemingly makes financial sense to complete as much work as possible on your renovation when using a hard money loan. After all, doing the work yourself can keep valuable funds in your pocket to bolster overall profitability of the project. However, there are significant reasons why you cannot or should not make this your renovation plan. There may be some steps that can be taken on your own, such as landscaping or demolition. However, many other steps need to be or should be completed by a licensed and insured contractor. Your hard money lender can provide you with more information about its specific requirements.

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Is an LLC needed for a hard money or portfolio loan?

An investor may want to pursue a hard money loan for a property addition to his portfolio. Hard money lending is typically used as a tool for completing real estate transactions. You are most likely to receive a hard money loan from an LLC. Understanding the role of the LLC in dealing with hard money loans is important for all prospective investors. 

Preparing to pursue hard money loans

It is best to pursue lending through an LLC for a hard money loan. Hard money loans are usually handled through an LLC or other corporate entity. The reason why people transact through LLCs is because they are viewed as much more credible. Consulting with an expert when creating an LLC to determine the ideal structure for your business is important. A business adviser or attorney can be helpful with this process. Any property that will be considered in a hard money loan arrangement will have to be unoccupied. Any loan taken out will be treated as a short-term loan, meaning that the term may be for 10 to 15 years.

How many LLCs do you need?

There are many options for using an LLC in hard money transactions. One option is to set up an LLC for a property. The other option is to set up one LLC to handle all hard money transactions across multiple properties. The most common approach is to set up an LLC for each property where hard money is used. This is because most lenders issue loans for a property. Lending money to an LLC for a single property is more desirable in the eyes of the lender. In using one LLC for all hard money transactions, each property has to be set up as a separate entity within the structure. An attorney with expertise in corporate structures is necessary to bypass any potential losses. It’s important to note that the way the corporation is structured internally affects the impact one property at risk has on the entire portfolio of properties. 

What are the benefits of an LLC?

It is beneficial to handle all loans through an LLC. The corporate structure offers a few protections. An LLC can prevent potential foreclosures. Although foreclosure is not a major risk for most investment scenarios. The LLC will likely issue shares, which will then serve as a form of collateral. If the structure of the LLC separates the various properties, then a property at risk of foreclosure or with a claim against it won’t destroy the entire company itself or affect the profitability of any other property. The chances of getting a larger loan amount is greater when you are working through an LLC. Lenders prefer to issue hard money loans to a corporate entity of some sort. The structure of the LLC can be changed at a later time to set up partners and distribute assets. Privacy is another advantage of setting up an LLC. The LLC will protect assets, which makes them difficult to track and monitor. If the property and title are held in the name of a corporate entity, a claim made against the individual won’t affect the property. The opposite is true. If a person brings a claim against the property owner, the person’s assets will never be affected. 

Other considerations

If a loan is issued to the LLC, the property owner won’t be able to recover assets as easily using the foreclosure option. An LLC actually ties up assets, so it will be some time before funds become accessible. If the group has entered into some sort of legal entity, all members of the group have to agree on how proceeds and other major financial decisions are handled. If you are putting together a contract for a property, it is imperative that the property be assigned to an entity. If the loan was taken out under an LLC, the person acting on behalf of the entity must be designated in a resolution.

There are specific advantages to taking the LLC route to pursue hard money loans. The LLC can cover one hard money loan or multiple hard money loans. One LLC would have multiple properties isolated within the structure in order to protect each property from claims stemming from one property. Another setup involving multiple LLCs would create an entity for each project or property. The purpose of an LLC is to separate personal risks from business risks.

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How much do hard money lenders require as deposits?

Hard money loans come with a long list of misconceptions. The stigma is they are for the desperate and the financially challenged, and it’s not uncommon for consumers to worry they’re being taken advantage of if they take out a hard money loan. While it’s true these loans are for those who have a challenged credit history, it’s not the only thing a hard money loan is good for. It’s a great way to get a construction loan, to get a short-term loan, and it’s a common loan for house flippers to use when they need the cash to rehab a home they’re flipping. 

Some hard money loan lenders require you pay a deposit for your loan, and this is known to confuse many borrowers. Do you need to place a deposit on a loan? Is this a sign of a shady company looking to steal your money and not give you the loan you need? How much do you put down as a deposit? Do you get your deposit back? Is this normal? These are just a few of the most common questions people have regarding hard money loans and deposits, and the answers are a lot simpler than many people realize. 

Do I need to pay a deposit to a hard money lender? 

The answer is yes and no. Some lenders require you pay a non-refundable deposit prior to being approved for a hard money loan. Others don’t require you pay a deposit, but it all depends on how much you’re borrowing as well as the type of loan you’re looking to secure. For example, if you’re looking for a single-family home loan from a hard money lender, you aren’t required to pay a deposit. You’re most likely a credit-challenged individual looking for an approval with which to purchase a home, and lenders will not charge you a fee or deposit to secure a loan of this nature. 

If you are working on a flip loan to rehab a property and sell it for profit, you might be required to pay a deposit. It’s a non-refundable deposit, and you cannot secure your loan without it. If you’re worried you must pay a deposit, check with your lender. Most require one in many loan cases, but some don’t. 

How much is the deposit I must pay? 

There is no right or wrong answer to this question regarding deposits and hard money loans. There are various deposit requirements with different lenders. The general rule, however, is the deposit must be at least $1,000. It can range into the tens of thousands of dollars depending on the amount of the loan, your personal story, and the details of your loan. You won’t know for certain what you need to pay as a deposit until you speak to a lender. 

The good news is you can speak to a lender prior to applying for a loan to get an idea of what you’ll pay as a deposit. You can use this information as a deciding factor to help you determine what you’re paying and whether the loan you’re considering is worth the fees required to apply for the loan. 

How do I know it’s safe to pay a deposit to a hard money lender? 

The answer is simple. If you’re applying for a single-family loan, you don’t need to pay a deposit. The general rule is these types of loans don’t require a deposit. If a lender is asking for a deposit before you apply for their hard money loan to buy a single-family dwelling in which your family will live, you should consider walking away and looking for another lender. 

If you are making a large purchase for a commercial building, a flip house, or something of that nature, you might need to make a deposit. If you find yourself worried, the best thing you can do is compare two or three hard money loans and the requirements for each. If all the loans you look into require a deposit, you’re making a deposit. If the loan doesn’t require one with the other companies, you might consider it a safer financial bet to walk away from the lender requiring a deposit and work with another company instead. 

Hard money loans are generally misunderstood by many consumers, but they can be quite helpful in many situations. Prior to applying for a hard money loan, do your homework and learn what’s required, what’s expected, and what to look for. Knowledge is power in a situation of this nature, and you cannot know too much about protecting yourself, your investments, and your finances. If a hard money loan is your only option, be sure you’re getting the best possible loan available to you in the most affordable fashion.

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How Often Do Hard Money Lenders Make Loans?

If you are looking for an easy way to borrow money to buy a home, a hard money lender may help you accomplish that goal. Unlike a bank or credit union, there is generally no credit check associated with a hard money loan. Instead, the lending decision is generally made based on the judgement of the lender him or herself. 

How Many Loans Will a Person Make?

In most cases, a hard money lender is an individual or small group of people who pool their money together. Therefore, whether a loan gets made or not may depend on how much money that person or group has to give to an applicant. However, there is no set number of notes that a lender is restricted to having out at one time. 

Some individuals or groups will choose to have only a few notes outstanding at any given point while others will have hundreds or thousands at once. It is also possible that some will take the interest generated on other loans and use that money to fund additional projects. 

Market Conditions May Impact a Loan Decision

If the housing market is going through a period of weakness, a lender may not want to invest in a home flip or rehab project. This is because it may take the borrower longer to sell the house or may limit what the borrower can get from a buyer. In the event that a loan is made, it may come with a higher interest rate or other terms such as demanding points be paid upfront. 

These terms may help to shield the lender from some of the risk associated with a possible default. While a hard money loan is secured with the property purchased with the proceeds, it can take time to sell or rent a property. The time it takes to recoup the money lost after a deal defaults could represent a lost opportunity to invest in a more profitable home rehab or flip. 

How Long Is the Loan Term?

The longer a person has to repay a loan, the longer a lender has to wait to see his or her capital returned. As a general rule, those who allow for loan periods of longer than a year will make fewer loans than those who allow for loan periods of several months. Typically, a hard money lender will ask for his or her money back in about six to 12 months. 

Personal Preference May Come Into Play

For most hard money lenders, providing financing to rehab or flip a home is seen as a way to earn large returns on capital in a short period of time. However, many hard money lenders realize that there is a lot of risk involved as well. Therefore, they may be choosy as to who they lend to or what projects that they are willing to finance. For example, some may only want to finance projects involving multifamily homes or homes in a neighborhood where price growth meets a predetermined target. 

Does a Lender Work Nationally or Locally?

Lenders that work nationally may make more loans than those that lend to local borrowers only. This is because there is a larger pool of borrowers in the entire United States than there would be in one specific area. Generally speaking, those who seek out borrowers in all 50 states may be motivated to make deals wherever they make sense. This may provide an opportunity for borrowers who don’t want to work with local lenders or can’t come to terms with them. 

What Does the Law Say?

Most states have usury laws that limit how much interest can be charged on a loan product. There may also be loan paperwork and other regulations that lenders have to contend with once they get to a certain number of notes outstanding. Those who don’t want to deal with a lot of paperwork or red tape may only choose to lend small amounts of money to a few people at a time. 

Those who are looking to flip or rehab a home may not want to get a traditional mortgage. In some cases, they may not qualify for one. The good news is that hard money lenders generally ignore a person’s credit and focus instead on the potential value of the home after it has been fixed up. However, borrowers may need to investigate several different lenders to find one that fits their needs and budget.

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Hard Money: What is It?

The Great Recession and various financial crises that have taken place in the intervening years have had strong ripple effects on credit markets nationwide. Many people who were negatively affected by the housing crisis and other economic woes ended up with damaged credit records and scores. At the same time, a large number of these individuals owned significant amounts of real property that needed ongoing financing in order to promote continued viability.

The juxtaposition of these and other factors created a market of landowners and developers who, though viable financially, were unable to secure loans from mainstream lenders like large banks. This, in turn, encouraged the rapid growth of what is colloquially known as the hard money market.

While they present real risks to investors and borrowers alike, hard money loans do serve valuable purposes in the new economy. The hazards inherent in hard money deals are also accompanied by possible rewards for investors who can successfully locate loan opportunities with high rates of return.

Hard Money: What is It?

Hard money loans are part and parcel of the informal credit market. Unlike the formal credit markets that are inhabited by large mainstream lending institutions like banks, informal lenders focus their collective efforts on people and companies that have cannot obtain loans from mainstream lenders.

As such, hard money brokers often deal with individuals and business entities that may have less than perfect credit records. In order to serve this market, lenders rarely run credit checks on their hard money loan applicants. Rather, these loans are usually backed up by collateral. Given the size of many hard money offerings, brokers and their backers often deal with borrowers who can secure their loans with real property.

In addition to their collateral requirements, hard money brokers usually charge their loan recipients higher than market interest rates that may reach 25-percent.

Hard cash brokers may accept personal or commercial property as collateral for their loans. In the case of personal property with mortgages attached, lenders prefer to deal with customers who own properties that have low loan-to-value ratios. By doing this, they make it easier to recoup funds from defaulted hard money loans.

Hard money loans thus offer clear opportunities for investors who are willing to do a little homework. Part of this research often involves searches for reliable and experienced hard money brokers.

Who are Hard Money Brokers?

Hard money brokers are individuals who receive loan brokerage permits or licenses from state or national governmental institutions. In many jurisdictions, hard money brokers are also real estate brokers who provide loans to individuals and businesses.

Depending on its size, each state may have hundreds of licensed brokers on their rolls. Given the abundance of such professionals, it is natural that some of them may operate unprofessionally. By the same token, the majority of such brokers, while often offering tough terms, deal fairly with their clients.

For investors who wish to break into the hard money lending arena, real estate brokers and their organizations are good places to begin their searches.

Who can Lend Hard Money?

In order for large institutional lenders like banks to legally make loans, they must comply with many regulations. In contrast, investors who operate in the informal credit market face few barriers to entry.

Many hard money investors form corporations that may include any number of people. These legal entities can help to protect business owners from most liability issues. They may also need to conform with the lending regulations in force in their areas of operation. For example, many jurisdictions limit the amounts of interest that loan brokers can charge their customers.

Other than these and a few other minor setup procedures, many people who wish to earn better than average returns on their investments work with hard money brokers to reach their goals.

What Should Lenders be Aware of?

While hard money markets can provide good returns, they can also be sources of financial danger. In order to avoid tragic capital losses, investors should stay aware of possible dangers and trends in the informal credit markets.

Most hard money loans are short-term loans taken out by individuals with real property to use as collateral. In the past, inexperienced hard cash investors have used brokers who failed to examine collateral properties before closing loans. Such unexamined properties have sometimes proven to be unusable, and have thus cost investors dearly.

While such episodes may be rare, it pays for would-be investors to carefully investigate any potential projects and also the brokers that supervise them. By doing so, hard money lenders can protect their investments and help to ensure healthy returns.

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Are owner-occupied home hard money loans different from all other types?

Hard money loans differ from conventional loans in many ways. A hard money loan is secured by real property to protect against borrower default. With conventional loans, the creditworthiness of the borrower is the protection against default. Sometimes these are called last resort, or short-term bridge loans. They can be used to finance property until the person qualifies for a conventional loan.

There are many more rules for owner occupied properties, than for those that are not owner occupied. Hard money loans for owner occupied property have regulations that differ from state to state. For owner occupied property income must be verified with third-party to determine the borrower’s ability to repay the loan. In addition, this is considered a high cost loan that requires property taxes to be escrowed and hazard insurance for the loan for the first year. Another federal requirement is that borrowers participate in a credit counseling class prior to signing the loan paperwork. Owner occupied properties take longer to foreclose upon than non-owner-occupied properties. These regulations are for the protection of the home owner and do not apply if the loan is for a property that is not occupied by the owner.

Lenders

Hard loans are not offered by traditional banking and mortgage institutions. They are typically financed by private investors using their own funds or a line of credit. One difference between hard loans and conventional mortgages is that a conventional mortgage is typically sold to a larger banking institution. With a hard loan, the original lender keeps the loan throughout its duration.

With hard loans, you can usually close in a shorter time than it takes to close using a conventional mortgage. Closing usually takes place on a hard loan within a week or less. These types of lenders typically have more relaxed standards for underwriting than traditional lenders. This is because the loan is secured with real property.

Financial Differences

Hard money loans offer the highest interest rates of any loan type, even above subprime loans. They are typically considered short-term financing for people who have poor credit but have equity in their property. These types of loans are riskier for lenders because the properties are usually distressed. The average hard money loan has terms from between three and five years.

Rather than having a significant down payment, hard money loans require that the borrower has a significant amount of equity. Many lenders require at least 25% or more in a home owner’s equity. Because the creditworthiness of the borrower may be questionable, these are highly risky loans with a high rate of default.

Things To Consider

The most common scenario for a hard loan is someone who wants to buy and renovate another property, or flip and refinance it. They are also used to buy rental properties. Hard money lenders do not have to follow the same rules as traditional financial institutions.

Many lenders will consider the market value and potential resale value of the property as a primary concern for deciding to a loan. They want to make certain that they can get their money back if the borrower defaults and that they do not get stuck with a property that is unsellable.

Hard money loans can be used to make an existing purchase offer more attractive because the sellers will get their money sooner and will not have to go through all of the regulations required by a traditional mortgage. In some cases, a cash offer can help the buyer negotiate a lower purchase price.

One of the main advantages of a hard money loan is that it allows borrowers who have had issues in the past obtain the cash that they need. The borrower can access their funds even if they have a low credit score, low income, or have had dings in the past. For owners who live in their home, they can use hard money loans to finance additional purchases, renovations, or repairs. This may make the attractiveness of the loan more enticing for lenders because it will increase the value of the property. The most important consideration for owner occupied properties is to do your research before signing.

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What are typical hard money lenders terms?

Your primary experience with real estate lending up until this point may be with traditional banks and credit unions. If you are now thinking about applying for a hard money loan, be aware that hard money loan terms are substantially different than the loan terms offered by banks and credit unions. Remember that hard money lenders are private companies or individual investors who are lending their own funds. While some applicants use hard money loans as a temporary financing solution when they need a fast closing, many others use hard money loans because they have a loan request that a bank will not approve. In many cases, these loans are seen as too risky for a traditional bank. 

Because of these important factors, you can generally expect hard money loan terms be significantly different than bank loan terms. Hard money lenders review each loan request on a case-by-case basis. They review all strengths and weaknesses of a loan request to make a decision about how risky it is. In addition, they want to determine if there is substantial upside to the transaction. Hard money loans can be used for residential and commercial properties as well as for development or construction in some cases. They can also be used for rehabilitation or renovation projects as well as for funding while occupancy stabilizes, repositioning related to new property management and more. Because each hard money loan is unique and each lender analyzes loan requests differently, each set of loan terms on an approved hard money loan will be customized specifically to the scenario.

Loan-to-Value
While lending terms for hard money loans across the board are customized based on the scenario, keep in mind that most hard money loans have a low loan-to-value. For example, on a commercial hard money loan, it is common for the loan to value to be 60 percent or less of the sales price or property value. This means that a buyer using a hard money loan would have to pay at least 40 percent down as well as closing costs. Closing costs on a hard money loan can be expensive in comparison to traditional bank loans. Keep in mind that each hard money lender may have specific property types that it lenders on as well as maximum loan-to-value limits for each property type. 

Interest Rate
Interest rates on bank loans vary based on the property type, the use of funds, the borrower’s credit score, the loan-to-value and other factors. These same factors can affect the interest rate on a hard money loan, but hard money lenders do not have a pre-established pricing sheet that they use to determine interest rates. In many cases, lenders analyze the specific factors of a loan request. The interest rate is tailored to meet the specific circumstances for the scenario. However, expect the interest rate to be substantially higher than the rate for a bank loan. 

Interest rates for hard money loans may be fixed or adjustable for the term of the loan. Fixed rates are more common with shorter term lengths, but this is not always the case. When applying for a hard money loan with an adjustable interest rate, pay attention to the maximum interest rate that can be charged in a worst-case scenario to ensure that the loan would still be affordable.

Loan Term
Another important factor to consider when applying for a hard money loan is the loan term. Most traditional bank loans have a very long term and are fully-amortizing. For example, a fully-amortized 30-year loan is common for a residential loan from a bank. This means that the loan payments will be spread out over 30 years and that the entire loan balance will be repaid at the end of that 30-year period. Most hard money loans have a very short term, such as between 12 and 18 months. The loan typically has a balloon payment, and this means that the borrower needs to have an exit strategy for the loan. Most hard money loans are either extended through the hard money lender or refinanced into a permanent bank loan. In some cases, the loan is paid off when the property owner sells the property. 

Remember that these are general guidelines for hard money loan terms. Each lender has its unique way to price loans, and each loan is individually reviewed by lenders. This means that you typically must contact multiple lenders with specific information about your loan request in order to obtain a personalized quote for your loan request. Before formally submitting an application or loan request package, it is helpful to contact a lender’s representative by phone to discuss your scenario. This can help you to avoid wasting time submitting a loan request to a lender who may not be able to help you.

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Why does the lender need title insurance?

Title insurance is one of the many hidden costs when purchasing a property. The title must be insured and policy regulations are managed at the state level. Title insurance is a requirement for most property requirements. The title insurance must be purchased at the same time the transaction is conducted. Here is an overview of title insurance and how it works.

What is title insurance?

Title insurance protects the owner and lender from financial loss. The real property can come with a range of defects that may be discovered well after the property was purchased. The coverage is considered to be a form of an indemnity policy. The coverage protects the mortgage loan and the property owner’s rights to the real property. The policy expires when the home is officially paid off.

Why do you need title insurance?

A person can buy a property and conduct business as the owner of the property. Years after purchasing the property, it may be discovered that the title was defective. As a result, the property owner can be subject to lawsuits and claims. With a policy in place, the title rights cannot be challenged, which could subject the owner to financial losses. Once the title is thoroughly examined, the chain of the title may be found to have liens, easements, encumbrances and outstanding property taxes. Financial compensation is awarded to the policy holder if there are any new defects discovered when researching a title of a property. Should the asset be devalued as a result of a claim made against the property, the owner receives compensation because the defect is covered. 

Title insurance features

Title insurance comes with a range of protections. It offers protections if the owner has interest in the title. If there are liens or easements, the property’s title is also protected under such a policy. Any defects discovered at a later time are covered as part of the policy. Any claims stemming from fraudulent incidents such as duress, fraud, forgery or impersonation are also covered under the policy. Violations including permitting and zoning challenges are also protected.

Basic protections

• Compensation for tax and creditor liens
• Legal and litigation costs
• Title search
• Losses associated with improper property transfers

When do you need title insurance?

You are required to purchase a new policy in most real property transactions. If you are refinancing a mortgage, you may be instructed to take out a new title insurance policy. The lender is protected for whatever is owed at the time the real property is refinanced. If buying a new property, you will be required to purchase coverage by the lender. 

Are there different types of title insurance?

There are two different types of title insurance policies. There are lender and owner policies. Both provide protections for potential claims and financial losses should an issue arise later after the purchase of the property.

The owner’s version of title insurance protects the property owner if there are any losses or damages. If the property has a lien on it, the policy protects the owner. If it is discovered that the property is not accessible, then the owner is compensated. If the property is found to be owned by someone else, the policy will be used to cover any future losses. The policy covers every form of potential loss that could be suffered by the property owner that isn’t named as an exception. The title coverage also protects the owner’s right to sell the property. It also guarantees access to the land. 

The lender policy is different in that is must be first approved by the American Land Title Association. Available exclusively to lenders, the policy covers the value of the mortgage. If there were any creditor liens against the property, the policy would cover any potential financial losses if the creditor’s interests superseded those of the lender. The policy also provides coverage for losses outlined in the owner’s policy. In the case of undisclosed second mortgages or any cases where the lender is exposed to financial risks, the lender is protected from any loss.

A title insurance policy can be taken out for an owner or a borrower. The policy remains in place until the mortgage is completely paid off. The terms change if the property is sold. If the property is ever sold, a new title insurance policy must be taken out.

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Why You Should Hire a Workers’ Compensation Lawyer

If you have experienced a workplace accident that resulted in an injury, you are probably wondering where you should turn for help and support. Your injuries could result in expensive medical fees and prevent you from reporting to work while you recover. 

Unless you get a fair settlement or win your fight in court, you could get stuck paying for your losses out of your own pocket, which is a situation you will want to avoid. If you would like to optimize your odds of getting a favorable outcome so that you won’t need to struggle to pay your expenses, enlisting a workers’ compensation lawyer is the only smart move. 

Your Company Won’t Always Have Your Interests in Mind

You likely trust your employer to do the right thing if you have never dealt with a workers’ compensation case, which is understandable. Even though the legal system designed workers’ compensation to give injured workers a fair payout, your employer will have its own interests in mind, not yours. Your company won’t want you to get the compensation you deserve because it will affect the company’s bottom line. 

Building Your Case

Keeping your needs in mind at all times, your workers’ compensation lawyer will review the details of your case and collect the evidence in your favor. A skilled and compassionate legal expert will look at your medical bills, witness statements and other things relevant to your case. This process will let your lawyer prepare and organize the facts in a way that will boost your chance of winning your legal battle and achieving your objectives. 

Defending Your Rights

In a perfect world, companies would respect an employee’s right to seek compensation after an accident takes place, but that is not what usually happens. To discourage other employees from filing claims, some managers will harass, demote or fire employees who stand up for their rights. 

Although such actions are illegal, companies are often careful to cover their tracks and avoid detection. You won’t need to worry about that situation when you have a lawyer in your corner because she will know the things for which to look. When you have a lawyer on your team, your company will be much more careful with how it handles your case. 

Negotiating a Settlement

Workers’ compensation lawsuits are long processes that can quickly become complicated, and juries are not predictable. To help you avoid a long battle and to get you your compensation as quickly as possible, your lawyer will speak to your company to reach a fair settlement that makes sense for you. Throughout each step, you will know what is happening and get advice on how to proceed in a way that will give you the best odds of success. 

Fighting in Court

A quality lawyer will offer advice on whether you should accept the settlement, but the choice will always be in your hands. If you feel as though the settlement is fair and that it will cover your expenses, your lawyer will accept the deal. Your lawyer, however, will take your fight to court and present your case to a judge or jury if you are not thrilled with the settlement terms. 

Final Thoughts

While the costs of a workplace injury can add up faster than you might think, workers’ compensation can help if you follow the right steps. You will need a talented and caring lawyer on your side so that you can get a fair payout that will ease the pain of your situation. Confidence and peace of mind are what you can expect when you have a proven workers’ compensation lawyer, and you will know you have made the right call.

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Are there additional costs during the refinance process?

Along with the basic costs of a refinance project, there are often some additional costs that many people do not take into account. These costs can sneak up on an individual and create a bad financial situation when a little bit of planning would have saved a lot of trouble.

Here are some of the most prevalent additional costs that you may see if you are trying to refinance.

The Mortgage Application Fee

Before you even get started with the process of refinancing, you have to pay a fee to turn in the application. Depending on your state and financial institution, this fee may be between $250 and $500. You should look out for other fees like this throughout the process, because this will not be the only fee that you take on as you try to refinance.

The Appraisal Report

If you are looking for a lender to give you money based on the value of your home, that lender will likely require an appraisal given by a company that the lender trusts. Along with this appraisal comes a fee. Usually, the appraisal report fee will run between $300 and $600. Depending on what the report finds, you may have to come out of pocket with more cash to make up for the low loan to value ratio. Alternatively, you may have to put down money for mortgage insurance.

The Loan Origination Fee

If you are asking for a more expensive loan, then the loan origination fee will be more expensive as well. This is a fee that is not flat – you will pay about 1% of the total value of the loan that you want. For instance, if your principal balance to be refinanced is $500,000, then you will have an origination fee around $5000. You may have a little bit of room to negotiate this fee depending on your good faith estimate, but in most cases, you should keep around 1% handy.

The Document Preparation Fee

The people who want to see your documents will charge a fee for preparing them. Lenders will typically make this fee anywhere between $200 and $500. There is no way to get around this fee, so you should just grin and bear it.

Flood Certification

Depending on which area of the country you are in, you may have to get flood certification for your lender to consider refinancing your home. There is a discussion in Congress about reforming the National Flood Insurance Program bill. If the Reformation goes through, the areas of the country that are subject to a flood certification fee may change. Make sure that you understand exactly where this fee applies so that no one can apply it to you unjustly.

Title Insurance and Title Search

Your lender needs to make sure that you actually own the title to the home the you are trying to refinance. It is not enough for you to say this – the lender needs to look for the documentation in the public record. This requires an official title search. The cost of this title search is usually between $200 and $400. This is especially prevalent if you still have a lien on the home that comes from another bank.

Title insurance helps protect the lender against any problems that may occur if the title needs to transfer. Rates on this type of insurance vary a great deal, although you should look to pay between $400 and $800 depending on the total value of your property.

The Recording Fee

You will owe fees to the county or the city that your property is stationed in as well as to the lender. One of the most prevalent of these fees is called a recording fee. The county charges this for handling all of the official paperwork. Depending on the county that you are in, you should look to pay between $25-$250.

Amortization

This is perhaps the biggest cost that you will incur when you try to refinance your home. Amortization is a cost that applies from the second that you first begin your application. It refers to the method in which your payments are applied towards the reduction of your principal. Basically, all of the money that you pay back does not go towards your principal – some of it goes towards the interest. All of this depends on your amortization, and it can make a huge difference in the total amount that you pay.

This is far from a full list of the fees that you may incur if you are trying to refinance your home. Make sure that you understand the processes in your county and with the lender that you choose before you move forward with this.

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What Companies Provide Hard Money Loans?

With interest rates in the real estate markets set to rise, times may be getting ready to get tough for real estate developers. That said, it may also be a time of great opportunity. This is because as many large mainstream banking institutions continue to tighten their lending requirements, they also continue to freeze larger numbers of people out of the mainstream lending markets. Such individuals represent a sizeable chunk of the credit market. Hard money loans serve this market and help to fill the growing gulfs between regular banks and credit challenged people. While they do pose some real risks, they may allow careful individuals to finance successful projects that may be otherwise impossible to pursue.

Just What are Hard Money Loans?

Hard money loans are special cash offerings that people with less than perfect credit can apply and qualify for. Offered by hard money brokers, these loans often span amounts from as little as $10,000 to over $25,000,000 or more, making them useful for people who need to purchase or develop real property. Because they tend to serve individuals who need large amounts of money quickly but who may not have perfect credits scores, hard money loans can carry higher than average market interest rates. That being said, hard money brokers and offerings can fill holes in the regular real estate credit markets and allow for the development of properties that may otherwise lie dormant.

How Does the Hard Money Loan Process Usually Work?

While the hard money loan process may at first seem complicated, it can actually be fairly easy to grasp. The hard money market exists to serve loan applicants who are on regular institution loan-rejection lists. While such people may have had personal or commercial financial difficulties in their pasts, many of them are skilled and experienced professionals who may have simply had bad luck.

Since most regular banks refuse to do business with people with relatively low credit scores, these individuals are often obliged to find reputable hard money lenders in order to finance their personal or commercial real estate projects. Hard money lenders may raise money for these loans from a variety of sources, including regular banks and private venture capitalists. Once they secure funding, brokers then use it to finance their clients. Since they serve individuals with low credit scores, brokers usually require applicants to put up collateral. In the case of hard money loans, real estate assets such as land or buildings are often used for this purpose. Once an agreement is finalized between brokers and borrowers, the funding is turned over to clients for use as they see fit.

This process usually works well for all concerned parties, even though these loans tend to come with higher interest rates than regular bank loans. If all goes well with the borrowers and their projects, they will be able to repay their loans in the agreed upon time periods. If not, lenders may seek to recoup their funds by various means that may include using collateral lands to pay for outstanding loan balances.

What Situations are Appropriate for Hard Money Loans?

People who are interested in getting hard money loans should approach the process with caution since the consequences of defaulting on these kinds of loans can be high.

If used properly, hard money loans can be very useful in certain situations. These include:

• Short Term Loans: Hard money loans tend to carry higher than market interest rates that can span between 10-18-percent. At these rates, it makes sense for loan recipients to use their funds for short-term projects like buy and flip deals.
• Interim Loans to Prevent Foreclosure: People take out home equity loans for many reasons, including for medical bills or to send their kids to college. Sometimes these loans may go into default, which can lead to foreclosure. Individuals who are facing foreclosure but still have large amounts of equity in their homes can often use hard money loans to provide emergency funding until they find permanent refinancing options.
• Downpayments for Expensive Properties: Real estate opportunities come few and far between, and when they do appear it is vital for developers to seize the day. Many prime properties require large down payments to secure control, and sellers may demand these funds on short time frames. Hard money brokers can often finance these deals quickly and with little fuss, allowing savvy investors to take advantage of unexpected real estate opportunities.

A Caveat Concerning Hard Money Loans

Those planning to get hard money loans should be aware of possible issues that could arise. These issues include problems with repayment terms.

Since hard money loans often run into the tens of thousands of dollars and they also carry high-interest rates, it can be easy for loan recipients to fall behind on payments and find themselves in deep financial waters. If this happens, borrowers may find their collateral properties used to pay off delinquent loan amounts.

In order to forestall these very real possibilities, hard money loan hopefuls should carefully calculate their future payment amounts and realistically assess whether they will be able to repay their loans at the proposed interest rates. If not, it is in their best interests to negotiate rates and loan amounts that fit within their projected budgets. In addition to these steps, it is also important for applicants to work with reputable hard money loan brokers.

Working With the Right Hard Money Lender is a key to Success

While hard money borrowers should be careful, if they have worthy projects and they do their homework they can often find success in their endeavors. Doing this kind of homework partially involves locating honest and reasonable brokers.

Each state may have dozens or even hundreds of licensed hard money loan brokers, and many of them are also real estate brokers. As such, a good place for prospective loan applicants to start looking is with their local real estate brokerage associations.

These organizations can identify brokers who operate fairly and honestly, saving applicants much heartache in the process. Once applicants have a short list of possible brokers, they should look for any past or present financial legal issues associated with their chosen firms. Loan hopefuls should also take looks at the user or customers reviews from reputable review sites, as these can be valuable sources of real-world information. Finally, loan seekers should work with brokers who are interested in their projects and who offer them reasonable terms.

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What documentation does a borrower need to submit during the qualification process?

When you apply for a typical bank loan, you often get qualified by completing a detailed loan application and agreeing to have the lender review your credit report. The bank will usually provide you with estimated loan terms with a conditional pre-qualification. Essentially, your loan terms are conditional to your ability to comply with all of the lender’s underwriting requirements. The hard money loan process is unique, and the differences begin during the qualification process. 

Hard money loan terms are quoted based on the unique attributes of the loan request. Each loan request is individually priced. Hard money lenders do not have a predetermined list of requirements that they can make a quote conditional to. Because of this, you can reasonably expect to provide hard money lenders with a substantial amount of detailed information about various aspects of your loan request upfront to determine interest and terms. Remember that the more accurate and detailed information that you provide initially, the more likely you are to get an accurate quote based on legitimate interest in your loan request. Each loan request is unique, so there is not a specific checklist of documentation that you should include during the qualification process. However, by learning more about general requirements, you can get a better idea about what documentation may be required by your hard money lender. 

Applicant Information
While traditional banks and credit unions typically require applicants to have a good to excellent credit rating, hard money loans are a financing option available for applicants with lower credit scores. Be aware, however, that hard money loans are not permanent loans. If you have a lower credit score and use a hard money loan for real estate financing, your exit strategy may need to involve selling the property to a qualified buyer at the end of the hard money loan term rather than refinancing the hard money loan with a bank loan. 

Applicants need to document that they have sufficient cash available for the down payment and closing costs. Be aware that a typical hard money loan may require at least 35 to 40 percent or more of the sales price as a down payment. Lender fees may also be higher than with a traditional bank loan. As is the case with a traditional bank loan, a hard money lender may require you to document a minimum level of liquid cash reserves available after closing. 

These are the primary applicant requirements reviewed. However, information related to your real estate investment experience, your portfolio of investments, your personal income level and more may also be taken into account, and these factors may make your loan request stronger or weaker in various cases. 

Property Information
The property is heavily analyzed during a hard money loan process, but there are not firm requirements for the property. Many hard money lenders only consider specific property types, such as residential or commercial real estate. Therefore, look for a lender that offers financing on the type of loan scenario that you are dealing with. The property’s condition should be carefully outlined, including the need for repair work, the current value or sales price and the occupancy data. Many hard money loans are used to reposition the property in various ways. Because of this, include information about how you plan to reposition the property and what you expect the property value and potential net income to be after the repositioning is complete. The sales contract and any available third-party reports should also be provided to your hard money lender. 

Other Important Details
Some applicants will provide vague details regarding their plans to rehab a property, or they may throw unrealistic income projection numbers out for the lender to analyze. Be aware that a hard money lender will typically ask for supporting documentation to confirm your numbers. For example, if you plan to renovate a property, a licensed contractor’s estimate should be provided. If your repositioning plan includes leasing up a multi-tenant property at market rental rates, an analysis of market rents for similar properties should be provided. This should include addresses, unit sizes and other details about the comparable properties that are being used. 

Many banks will provide applicants with a checklist of specific items needed for a pre-qualification as well as for final approval. This is because they need to ensure that a loan request meets very specific guidelines that are predetermined. Hard money loans do not have these specific guidelines, so there is not a universal checklist that is given out to all applicants for all loan requests. Instead, the lender will need to see documentation that is specific to your unique loan request. To get a better idea about the type of documentation needed for your loan request, you can reach out to a hard money lender rep to discuss your loan request.

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How many financed properties can a borrower have open to still qualify for a loan?

The unfortunate reality is that many people who need a real estate loan cannot qualify for necessary financing through a bank, credit union or other financial institution. One of the reasons why some applicants are denied the financing that they need relates to the number of outstanding real estate loans that they have. Commercial lenders typically do not have this type of borrower requirement, and many commercial real estate investors have a dozen or more investment properties that are each leveraged with one or two real estate loans. However, residential real estate lenders typically do have this type of requirement for applicants. 

Traditional real estate lenders may limit you to having between four to eight leveraged residential properties at a time. Be aware that this is not a federal or state regulation. Instead, it is a specific requirement that the individual lender has. This means that if you have been denied financing because of this reason with one lender, you may still qualify for a loan with another lender. Because of how common this type of lending requirement is with traditional real estate lenders, it may be easier for some applicants to apply for a hard money loan to overcome this challenge.

How Other Outstanding Loans Impact Your Qualification
Using leverage for real estate investments is an excellent benefit that many investors understandably want to take advantage of. The challenge associated with carrying many outstanding loans relates to liquidity and the ability to navigate through downturns and other issues. Imagine if you have ten properties that were each significantly leveraged and turning a minimal profit. If the market took a turn downward and occupancy dropped in several of these properties at the same time, you may have to dig into your liquid cash reserve to stay afloat until the market rebounded. On the other hand, if most of your loans were almost paid off when this happened and you had a huge cash reserve, the downturn may not be a major issue. 

With this in mind, some lenders will analyze your entire financial situation closely to determine your qualification status rather than make a flat decision about approval based on the number of loans that you have. 

Understanding Hard Money Lender Requirements
Each hard money lender has unique underwriting requirements and guidelines. Most do not have stringent requirements regarding the number of loans that you can carry at any given time. They do, however, look at the overall risk associated with extending a loan to you. Your total loan balance in relation to total property value plays into this risk. In addition, your overall net income and liquidity also will be considered. 

Hard money lenders are typically more agreeable to higher-risk situations that do not conform to traditional lenders’ guidelines and requirements. However, this does not mean that a hard money lender will approve a loan request that does not make sense or that has considerable risks. Remember that hard money loans have a much lower maximum loan-to-value than what you will find with a traditional real estate loan. To qualify for a hard money loan, you may have to put 35 to 40 percent down or more. In the event that this empties your cash reserves and you have a portfolio of highly-leveraged real estate that is barely turning a profit, you can see that this scenario is riskier for a lender to consider. While the number of loans does not usually impact a hard money lender’s approval decision, the overall impact of leveraged real estate on your financial situation will be taken into account. 

How to Determine If You Qualify for a Hard Money Loan
Your primary goal right now may be to determine if you qualify for a hard money loan. After you have been turned down for financing with one or more other lenders, it is understandable that you may feel discouraged about the options. You may even be thinking about walking away from the opportunity in front of you because of the perception that financing is not available. However, before you give up, reach out to a few hard money lenders. It is not feasible to get a firm answer from a hard money lender by simply speaking with a lending rep over the phone. Because the full loan scenario will be examined for approval determining, you need to submit a complete loan request to a few hard money lenders. 

If you have been turned down for financing with other lenders because of the number of leveraged properties that you own, this may not be an issue with a hard money lender. To determine with certainty what your options are, reach out to a few hard money lenders. However, keep in mind that you may still need to address the leveraged properties later when you try to apply for a permanent loan within the next year or two.

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