When you hear the words “hard money loan” What comes to mind? Some shady character ready to take advantage of you? Not So. Actually, hard money has emerged as one of the most convenient and very legitimate ways to solve the real estate financing puzzle.
What is a Hard Money Loan
A hard money loan is simply a short term loan secured by Real Estate or in some cases another valuable asset. Hard Money is offered by private investors or a fund or consortium of private investors, as opposed to conventional lenders such as banks or credit unions. The terms can run from as short as 6 months, to as long as 5 years. Most hard money loans have about a 1 year to 2 year term because they are intended to be a “short term solution”. Most hard money lenders prefer interest only payments but the longer the term, they may require a fully amortizing payment.
The amount a lender will lend to the borrower is based on the value of the property or the purchase price which is used to determine the actual market value. When using a hard money loan for a refinance the lender may require an appraisal in order to determine the value. (However, some hard money lenders have their own valuation method) Where a conventional bank will loan up to 80% to 90% of the value, a hard money lender will require a lower loan to value ratio such as a 50% to 65% often referred to as LTV.
In most cases the hard money lender is more concerned with the value of the property than they are with the borrowers credit score. Although some hard money lenders still require a minimum credit score as part of their lending criteria.
Property Types for Hard Money Loans
Almost any type of property qualifies for a hard money loan, including commercial or industrial buildings, single-family homes, (as long as they are not owner occupied) multi –family, construction or land. Most lenders have a niche that they prefer and will only consider property that fits there criteria. Also, there are very few hard money lenders who will finance vacant land.
Hard Money Loans Are Not For Every Transaction.
Hard Money is best used for investment property or speculation deals where conventional loans would not be available. For example, an investor wants to buy a house that needs repairs which would not qualify for conventional loans. Or for a fix and flip where the investor can use that money to make the purchase, rehab the property and then re– sell it in a short period of time. The profit they make will more than pay the carrying costs and put money in their pocket at the end. If you have good credit and have money in the bank, you might want to use a secured credit line at a much reduced cost.
Hard Money is a great source when banks or conventional lenders are not an option, especially when the loan is needed quickly.
Contact us today if you would like to learn more. 407-740-5166 or info@rrcommerciallending.com