This Article Is About Buying Rental Properties with Hard Money Loans Versus Non-QM Loans
What are hard money loans versus non-QM loans:
- Difference between hard money and non-QM loans
- The benefit of hard money loans during the booming housing market
- Cost and fees of hard money versus non-QM loans
- Types of properties hard money lender lend
Hard Money Loans Versus Non-QM Loans
Buying Rental Properties With Hard Money Loans benefits countless real estate investors.
Many investors who specialize in fix and flip housing rely on hard money financing. This is due to the limited paperwork required and the fast closing and funding. Buying Rental Properties With Hard Money Loans by real estate investors as a short-term bridge financing tool enables them to be able to fund real estate projects quickly with a fraction of the paperwork required by banks and traditional commercial lenders.
The good news is that Gustan Cho Associates now offers Non-QM Loans on investment properties where investors no longer have to rely on hard money loans.
Defining Hard Money
Hard Money Financing is a short-term financing option used by real estate investors to fund their real estate projects.
Terms generally are for a minimum of 4 months to no more than two years. Interest Rates On Hard Money Loans vary between 10% to as high as 18%.
3% to as high as 18% in upfront fees is the norm on hard money loans. The number of points charged and interest rates depend on the risk of the project and other variables.
Hard and private money lenders are more concerned about the property than the borrower when underwriting the loan.
Most Non-QM Mortgage Rates are lower than 10%.
How Does Hard Money Lending Work
Here is how hard money is used by many investors:
Hard Money is not just used by investors with bad credit. Investors who qualify for bank financing also use hard money loans as well.
Hard money is a popular loan program for fix and flip rehab projects. Hard Money Lenders will finance the acquisition PLUS the construction cost of the property.
Real estate investors purchase vacant properties with hard money loans. Buying foreclosures and properties from auctions.
Properties that are not habitable due to needing repairs and cannot be financed by traditional banks and lenders. Investors needing quick funding for real estate purchases.
Investors with equity in their properties are facing foreclosure and need fast funding to save their property.
Cost of Hard Money Versus Non-QM Loans
Hard Money Loans are generally more expensive than bank financing.
Most real estate investors find hard money well worth its extra costs. This is due to the quick turnaround time and the limited amount of paperwork required.
There are many instances where hard money can be closed in a week or less.
Creative mortgage strategies can in Buying Rental Properties With Hard Money Loans with zero money down by refinancing investor’s other properties. The cost of Non-QM Loans is a fraction of the cost of hard-money loans.
Benefits of Buying Rental Properties with Hard Money Loans Versus Traditional Loans
Hard Money Financing is not just for real estate investors with bad credit or no income verification. Buying Rental Properties With Hard Money Loans is often used by many established investors with blue-chip real estate portfolios and triple-A plus credit due to the following reasons:
Long-term loans normally have high pre-payment penalties. If borrowers pay off a loan early, the lender will charge them a percentage of the loan balance.
Fast closing than traditional lenders. Hard Money Financing closes in less than 4 weeks (2 to 3 weeks is common) versus over 60 to 90 days with banks and traditional lenders.
Types of Properties Hard Money Lenders Lend
Hard and Private Money Lenders also will fund the construction/rehab of the property where banks and traditional lenders will not. This can be quite costly.
Some lenders have pre-payment penalties of 5% the first year, 4% the second year, and 3% the third year. Many investors buying investment properties do not want to go with long-term financing until the property has been stabilized.
Investors may purchase a 10 unit apartment building where only 5 out of the 10 units are rented. The tenants may only be paying $500 per month. However, market rents after basic rehab are easily worth $1,000 per month.
Buying Rental Properties With Hard Money Loans gives time for real estate investors to rehab the 10 apartments. Gives investors time to rent it to tenants for market rent which is $1,000 per month.
Investors then go for end long-term financing at a much lower interest rate. They can then pay off the hard money lender.
Difference Between Hard Money Versus Private Money Lenders
The main difference between private and hard money is the private money lender is a private individual and/or group of private people lending the money.
Most private lenders normally do not deal with the actual borrower. They will have a business agreement with a commercial mortgage broker.
The mortgage broker will be the middle man between a private lender and borrower and make sure both sides are protected. In lieu of the mortgage broker’s services, the broker gets a fraction of the upfront points as their commission.
Hard money lenders are companies in business to lend short-term loans based on the property and not too much emphasis on the borrower.
Here is the reason why a person becomes a private money lender
When returns on other types of investments are very low, people with liquid cash look at alternative types of investments such as private money lending. Interest on Certificate of Deposits, even long-term CD, is at less than 1.0% where investors will take a loss when inflation is taken into the equation.
Higher net worth individuals are always looking for secured conservative, safe investment opportunities. Lending to real estate investors who have skin in the game (large down payment) is a secured safe investment for higher net worth individuals.
The investment is secured with skin in the game by the borrower’s down payment. If private money borrower defaults on their obligations, private money lender forecloses. The foreclosure process on investment properties is much easier and quicker than the owner-occupant primary homes.
Most private money lenders prefer to lend money to people they know and trust.
Hard money lenders are companies that have their own lending guidelines and matrix and lend money based on assets and not the individual.
How Can I Qualify for Hard Money Loans?
Real Estate Investors who have a down payment on an investment property purchase can qualify for hard money loans. The hard money loan process is much easier than the residential mortgage process. Hard money lenders are more concerned about underwriting the property and not the borrower. The borrower’s credit, credit scores, and income does not matter with hard money lenders. Investors who need to qualify for hard money loans for investment properties please contact Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.
June 14, 2021 - 5 min read