Hard money is typically used for short-term real estate projects that last from a few months to a couple of years.
A hard money loanis an asset-based loan with a higher interest rate than conventional loans and shorter repayment terms. These loans are typically used for rehab to a property. The loan amount is based upon a ratio of the loan amount divided by the current value of the house. Most hard money lenders will lend up to 75% of the property’s current value.
The term “hard money” was coined in the 1950’s when the credit industry made major changes. Hard money was considered a last resort for many property owners seeking capital in their real estate properties. Hard money lenders are not required to follow strict FDIC regulations. Since 2009 and the passing of the Dodd-Frank Act, the hard money loanmarket has considerably increased. The Dodd-Frank and Truth Lending Act put major regulations on banks for approving mortgages.
A hard money lender will determine the value of a property through a broker price opinion (BPO). Sometimes a lender will use a licensed appraiser to get the value of the property. Different lenders handle things in different ways.
Despite the higher interest rates that run from 8%-18%, these have become very popular loans due to their fast approvals, flexibility and less red tape. They are also a common choice for borrowers with poor credit.
Using a hard money loanfor a prime residency is not a good idea unless the borrower will be refinancing into a conventional mortgage in the near future. Hard money loans are interest-only loans up until the last payment, which is a balloon payment. This makes sense for projects such as fix and flips; buy a property, rehab it and sell it. Fix and flips have become a lucrative way to come up financially.
Hard money lenders will also lend on the After Repair Value (ARV). An appraiser will come out to assess the property, along with estimates and plans of what will take place during the renovation. The appraiser will then advise the hard money lender on what they believe the house will value at after all repairs are completed. Because all hard money lender have different term, conditions and handle each deal uniquely, the loan may be anywhere from 60%-90% of the ARV. There are some lenders that will fund 100%, however those loans are typically for investors with a proven track record. In fact, it is important for investors to create a relationship with their lenders. Once lenders trust an investor, they tend to become more flexible with their terms and conditions; and also, more understanding with repayment plans.
Although hard money loans are not for every person in every situation, they are very advantageous for those looking to jump on the real estate investing train.
Finding a lender that compliments your personality and one that you can easily work with may take some time. Most hard money lenders have a niche. Be sure to work with a lender that is familiar with your county regulations, as each county differs.
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.