What Are Hard Money Loans?
This BLOG On Hard Money Loans For Real Estate Investors Was Updated On May 11, 2017
By Gustan Cho
Many folks have heard of hard money loans.
Below is a brief outline:
- Hard money loans are short term commercial loans made by private lenders.
- Hard money loans are money that is normally based more on the collateral at hand than a person’s credit scores, income, credit history, and financial profile.
- Hard money loans are extremely expensive and require upfront fees as well.
- Hard money lenders often charge an upfront fee of between 3% to 10% and interest rates more than 12%.
Terms Of Hard Money Loans
Every hard money lender has their own lending criteria and requirements.
- Unlike traditional commercial and residential mortgage lenders, hard money lenders set up their own lending criteria.
- Hard money lenders is normally concerned more on the asset or collateral than the person’s credit scores and income unlike traditional commercial lenders.
- Most hard money lenders will only lend between 50% to 80% loan to value.
- Upfront Points are charged plus monthly interest only payments.
- Closing in two to three weeks.
- Depending on the lender, the terms of the interest payments can be due monthly or an interest reserve may be set up.
- Hard money lenders normally want a minimum term of 6 months and not more than a 36 month loan term.
- Even though most lenders are mainly concerned about the collateral, there are some lenders that will take income and credit into consideration for more favorable terms.
- Hard money lenders do not want to see outstanding judgments on the borrower due to the fact that the judgment may be enforced and a lien being placed on the collateral.
Benefits Of Hard Money Financing
Hard Money Loans have higher interest rates and costs than traditional commercial loans, however, there are many benefits to the right borrower. Real Estate Investors can take advantage of hard money loans on an appreciating real estate market. We close our loans in two to three weeks. Bad credit is not an issue and neither is income verification because it is underwritten based on the property and not the individual borrower.
Lets take a case scenario where a hard money loan is advantageous to a real estate investor:
- Let’s assume a real estate investor wants to purchase a property for $100,000 from a sheriff’s sale that is coming up shortly.
- He contacts a hard money lender and the hard money lender will approve a 65% loan to value loan to the real estate investor but wants a 6% upfront origination fee and 15% interest with a minimum loan term of 6 months.
- The real estate investor knows if he purchases this property from the sheriff’s sale and if he invests $20,000, he can resell the property for $200,000 in less than six months.
- The real estate investor decides to go for the deal.
Here are the numbers:
- Real estate investor needs to pay the hard money lender 6% of the $65,000 loan amount which is $3,900.
- Real estate investor invests $35,000 of his own money.
- Real estate investor invests $20,000 for labor and material to rehab the subject property and takes him two months rehabbing the property.
- Real estate investor then places the property in the market at a price of $200,000 and lands a purchase contract at the asking price of $200,000 within several weeks of listing the property and takes him four months to close on the property.
- Real estate investor need to pay six months of interest of $65,000 at 15% interest which costs him $4,875.
- Real estate investor needs to pay real estate sales commission of 6% or $12,000.
Here is the summary of this case scenario.
- Original investment from real estate investor is $35,000 down payment.
- $3,900 upfront fee of 6% to hard money lender.
- $4,875 interest payment to hard money lender: 15% annual interest rate, interest only payment for loan amount of $65,000.
- $20,000 rehab cost for labor and materials.
- $12,000 real estate sales commission to real estate agents.
- $5,000 in closing costs.
Total investment from real estate investor is $80,775
Property sold for $200,000 so net profit is $200,000 minus $80,775 which yields $119,225.
The above example is a simple case scenario where the transaction was extremely profitable to the real estate investor, however, not all transactions go smoothly where it is a win win situation.
- Borrowers of hard money loans should consider the risk versus rewards because investors can lose their entire investment.
- Commercial lenders are not regulated the federal nor state mortgage regulators.
- Commercial real estate investors are viewed as sophisticated investors so they do not have the protection of state and federal mortgage regulators.
Real Estate Investors and Property Flippers in need of hard money and private money financing, please call Gustan Cho at 800-900-8569 or text Gustan at 262-716-8151 or email us at firstname.lastname@example.org. Hard money loans close in two weeks. We are available 7 days a week, evenings, weekends, and holidays to take your inquiries.