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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