What Are Hard Money Loans And How Does It Work?

What Are Hard Money Loans And How Does It Work?

This BLOG On What Are Hard Money Loans Was Updated On May 10, 2017

What Are Hard Money Loans?

  • Hard money loans are short term loan programs that is secured by real estate or other forms of tangible collateral. 
  • Hard money lenders are more concerned with the collateral than borrower’s credit scores, credit, and income profile.
  • Hard money lenders who are real estate lenders normally will lend between 50% to 75% of the loan to value of the subject property. 
  • Real estate hard money lenders will normally charge upfront points and will offer borrowers short term interest only loans.  
  • Mortgage interest rates on hard money loans can range from 5% to 15% interest rate. 
  • Most hard money loan borrowers who do not qualify for regular conventional mortgage loans will seek the services of hard money lenders. 
  • Hard money loans are not for everyone. 
  • The hard money lender will lend on the assumption that they will take your collateral and that your default rate will be high. 
  • Most hard money lenders have no mercy and only care about getting their money back along with the interest. 
  • Most hard money lenders will lend on a short term basis, such as a one year to three year term.
  • Term of loans are normally interest only and the balance will be due at the end of the loan.

Hard Money Loans Versus Non-QM Mortgages

Private or Alternative Lending are the following:

All the above three loan programs are portfolio loans that most banks and traditional commercial mortgage banks do not want to take on. Most hard money lenders do not want to lend on residential owner occupant homes.

Here is the differences between residential owner occupant properties and investment property loans:

  • If borrowers default, foreclosing on residential owner occupant homes are much more difficult than investment properties
  • RESPA and mortgage regulations applies on owner occupant homes
  • Non-Traditional Mortgages, also referred to as NON-QM Loans, is a great form of alternative financing for owner occupant home buyers who cannot qualify for traditional conforming home loans
  • No waiting period after bankruptcy, deed in lieu of foreclosure, foreclosure, short sale
  • Bank statement loan program
  • No doc fix and flip loans for real estate investors

Hard Money Loans For Investment Properties

What Are Hard money loans and great benefits?

  • Hard money loans is a great tool to use for savvy real estate investor where they need temporary funding that a bank or mortgage banker cannot give due to the property condition or the credit profile of the borrower.
  • Hard money loans is not just for borrowers with credit issues.
  • Many real estate investors prefer hard money financing due to being streamlined with much less paperwork and quick 2 to 3 week closings.

Below is a typical hard money case scenario:

  • For example, lets take a case scenario where hard money loans will be a great tool for a hard money loan borrower. 
  • Say Jack Smith sees a foreclosure that is coming up at a sheriff”s sale and thinks he can purchase it it for $50,000. 
  • The property will need $10,000 worth of work and he feels that he can sell it for $100,000 after he remodels it. 
  • Jack Smith cannot qualify for a conventional or other traditional mortgage loan due to being self employed and not declaring all of his income on his tax returns but does have over $35,000 in cash:  Actual mattress money and not in the bank. 
  • Jack Smith contacts a hard money lender who will charge him an upfront 8% origination fee and a 15% interest only loan for one year for any sheriff’s sale property purchase as long as he can put down 40% of his own money. 
  • Jack Smith puts down $20,000, the hard money gives him $30,000 and Jack Smith buys the house. 
  • Jack Smith pays an additional $5,000 in fees to the hard money lender. 
  • Jack Smith starts renovations and sells the home in six months for $100,000. 
  • On this simplified case scenario, Jack Smith made some great money by getting his financing from a hard money lender. 
  • No other lender would have given him the money except the hard money lender. 
  • Although his costs and fees were extremely high, he came out ahead. 
  • On the flipside, if Jack Smith could not have sold the property for a profit and ran out of money, the hard money lender would have foreclosed on the home.

Hard Money Loans For Bridge Financing

Bridge loans used to be very popular prior to the 2008 real estate and credit meltdown and most banks offered bridge loans for commercial real estate investors and borrowers.  Unfortunately, most banks eliminated bridge financing programs.  Real estate investors in need of temporary financing and need a bridge loan, hard money lenders can be an excellent option.  Remember that hard money loans are very costly and if used right, it can be beneficial to those who have no other source of funding.

Borrowers who need more information on hard money and non-qm loans, please contact The Gustan Cho Team at 800-900-8569 or text Gustan at 262-716-8151 for faster response or email us at gcho@gustancho.com.

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