Hard Money 101: Everything You Need to Know About a Hard Money Loan
Looking for a quick and fast way to get funds for a property? Then a hard money loan might be for you.
So, what do you need to know to get started? We’ll provide you with everything you need to know about a hard money loan.
What is a Hard Money Loan?
At its core, a hard money loan is a short-term loan, about 12-24 months, provided by private individuals or investors than through a bank.
Rather than being approved for a certain amount, a hard money loan amount is based on a few factors such as the purchase price of the property, costs of renovation and the After-Repair Value (ARV). The monthly amount required for payment consists of only interest or interest and principal which is decided at the time of closing. Typically, the property is used as collateral for these types of loans.
What are Hard Money Lenders?
While a conventional lender places more emphasis on a borrower’s financial history, a hard money lender places more weight on the actual property value and the cash reserves of the individual taking out the loan. Because a hard money loan is a short-term loan, it’s generally used to quickly raise money for a project.
Terms from the lender are determined on a case by case basis as project length can be anywhere between 6-24 months. Interests rates are known to be higher with Hard Money because of how short the lending term is. Lenders have the ability to wave down payment requirements if the loan is below the max loan to value (LTV) ratio. This LTV can vary depending on the lender and can be up to 75% of ARV or higher.
Some hard money lenders have a specific type of property or niche that they specialize in. Others will have keen insights into the market that you’re looking to go into and will know when a deal is just too risky. They will still work with you as best as they can to ensure the success of your project. Ask them to ensure you’re finding the correct lender for your property.
How does Interest and “Points” work for Hard Money Loans?
Interest is heavily dependent on the lender and the risk involved in the loan which is factored in the loan-to-value ratio (LTV). Regions with plenty of hard money lenders will oftentimes experience decreased interest rates due to competition.
Points work in the same way, as each individual point counts as 1% of the total amount loaned. Once again this is also determined by the lender and the LTV.
What are the Benefits of a Hard Money Loan?
A hard money loan can be a versatile loan that has plenty of uses. The most popular uses for a hard money loan consists of, fix and flips, construction loans, and when an investor needs to act quickly.
Fix and Flip Houses
When working on a fix and flip, a hard money loan goes well with this type of project. Not only will you receive the funds needed for your project, but you only pay interest until it is completed.
Construction Hard Money Loans
A construction project is another case for obtaining a hard money loan. While a construction project can introduce many variables, a hard money loan is flexible and carries with it many leverages that will help get the project done.
Another scenario in which a hard money loan is best used for is to make a quick decision on a property. Since a hard money loan can close quickly and are more easily obtainable, an experienced borrower may be able to close deals at the best time.
As hard money loans increase in popularity so too does the amount of lenders. The best way to ensure you’re working with the right hard money lender is to ask around the market that you are interested in. Title companies and housing networks are a good insight into the more prevalent and “wholesome” lenders in the area.
At DFW Hard Money, we work with you to get you the loan that you deserve with no strings attached. To get started, contact us today with your property in mind and we can help get the process started!