Are you looking to invest in real estate but don’t have the capital?
Hard money loans may be your answer.
But, like all investments there are fees and potential pitfalls associated with these types of loans.
In this article, we’ll answer the question “what are hard money loans” and discuss how you qualify for one.
I’ll also address the fees and potential pitfalls related to them so that you can make an informed decision about whether or not they’re right for your project.
Table of Contents
What are Hard Money Loans?
A hard money loan is a type of short-term loan secured by real estate.
It is typically used by investors to purchase, renovate, or refinance an investment property.
The loan is funded by private lenders and secured by the value of the property being purchased.
Hard money loans are often used when traditional financing options are not available due to time constraints or other factors.
For example, if you need to close on a property quickly but don’t have enough cash for a down payment, you may be able to get a hard money loan from a private lender in order to make up the difference.
Another common use for hard money loans is rehabbing properties that require extensive repairs before they can be sold or rented out.
Investors who want to fix and flip homes will often take out hard money loans in order to finance their renovations without having to wait for traditional financing options such as bank loans or lines of credit.
The terms of each hard money loan vary depending on the borrower’s situation and the amount being borrowed, but generally speaking they tend to have higher interest rates than conventional mortgages due to their shorter repayment periods (usually one year) and increased risk for lenders.
Most lenders will also require borrowers put up some form of collateral such as equity in another property in order secure the loan against defaulting payments.
Finally, there are also fees associated with taking out a hard money loan which include closing costs (title search fees etc.), origination fees (which cover administrative costs), appraisal fees (to determine market value) and points (a percentage fee charged upfront).
These costs should all be taken into consideration when deciding whether or not it makes financial sense for your particular situation.
A hard money loan is a short-term financing solution that can provide access to capital quickly.
To learn more about the requirements and benefits of this type of loan, let’s take a look at how you qualify for one.
How Do You Qualify for a Hard Money Loan?
Qualifying for a hard money loan is not as difficult as it may seem.
To qualify, you must have sufficient equity in the property you are purchasing or refinancing.
This means that the amount of your loan should be less than the value of the property. Most hard money lenders want your loan to be no more than 60% – 70% of the current (or repaired) value of the property.
This is known as loan to value (LTV).
For example, if you are buying a home worth $200,000 and need to borrow $120,000 for the purchase price, then your LTV would be 60% and you would have enough equity to qualify for a hard money loan.
In addition to having sufficient equity in your property, lenders will also look at your credit score and history when considering whether or not to approve your application.
Generally speaking, borrowers with good credit scores (700+) will have an easier time qualifying for a hard money loan than those with lower scores (600-699).
Finally, lenders want assurance that you can make timely payments on your loan each month.
To demonstrate this ability to repay debt responsibly and consistently over time, most lenders require proof of income such as pay stubs or tax returns from recent years showing steady employment and/or other forms of regular income like rental income from investment properties owned by the borrower.
When applying for a hard money loan it is important to understand all associated fees so there are no surprises down the line.
Qualifying for a hard money loan depends on your credit score, income level, and other financial factors.
Now let’s look closer at the fees associated with these loans.
What Are the Fees Associated with Hard Money Loans?
Hard money loans are a popular option for real estate investors who need to access capital quickly.
While they can be an invaluable tool, it’s important to understand the fees associated with them before you commit.
The most obvious fee associated with hard money loans is the interest rate.
These rates tend to be higher than traditional mortgages and can range from 8-15%.
The exact rate will depend on your credit score, loan amount, and other factors. It’s also important to note that these rates may vary depending on the lender and market conditions.
In addition to interest rates, there are several other fees that come along with hard money loans.
Origination fees are typically charged by lenders as compensation for processing your loan application and closing costs cover expenses such as title insurance or appraisal fees which must be paid in order for the loan to close successfully.
Depending on the size of your loan, these additional costs could add up quickly so it’s important to factor them into your budget when considering a hard money loan.
Another common fee associated with hard money loans is points or “discount points” which represent prepaid interest charges paid at closing in exchange for a lower overall interest rate over time (usually 1 point = 1% of total principal).
This type of fee is usually only applicable if you plan on holding onto the property long term since it takes some time before you start seeing any savings from paying discount points upfront instead of having higher monthly payments over time due to a higher base rate plus interest charges each month.
Finally, many lenders require borrowers to take out private mortgage insurance (PMI) if their down payment is less than 20% of the purchase price.
This protects both parties should something happen during the repayment period where the borrower defaults or otherwise fails to make timely payments towards their debt obligation(s).
PMI premiums can range anywhere from 0-1%, depending on specific details surrounding a particular transaction/loan agreement between two parties involved – borrower and lender respectively – so always make sure to read through all documents carefully prior to signing anything.
Hard money loans can be expensive, but with the right knowledge and understanding of the associated fees, they can provide a viable financing option for real estate investors.
Now let’s take a look at some of the potential pitfalls that come with hard money loans.
What Are the Potential Pitfalls of Hard Money Loans?
The biggest potential pitfall of hard money loans is their short-term nature and high interest rates.
Hard money loans usually have terms of one year or less, so if you’re unable to pay off the loan within this timeframe, you could end up owing more than what your property is worth.
Additionally, if your credit score has deteriorated since taking out the loan, it may be difficult to refinance into a more favorable loan product.
Another issue with hard money loans is that lenders often require borrowers to put up collateral in order to secure the loan.
This means that if you default on the loan, you could lose whatever asset was used as collateral—which can include properties other than those being financed by the hard money lender.
It’s important for borrowers to understand exactly what assets they are putting at risk when taking out a hard money loan and how much equity they will need in order to protect themselves from foreclosure or repossession of their assets in case of default.
Finally, many hard money lenders charge higher fees than traditional mortgage lenders do—including origination fees and points (a percentage of the total amount borrowed).
These additional costs can add up quickly and make it harder for borrowers who already have limited funds available for financing their project.
Borrowers should take these extra costs into account when deciding whether or not a hard money loan makes sense for them financially.
It is important to be aware of the potential pitfalls associated with hard money loans, but understanding when it makes sense to take one out can help investors make an informed decision.
Now let’s look at when you should consider taking out a hard money loan.
When Should You Consider Taking Out a Hard Money Loan?
These short-term loans offer quick access to capital and can be used in situations where traditional bank financing is not an option.
Before taking out a hard money loan, it’s important to understand the potential pitfalls associated with this type of financing.
First, these loans tend to have higher interest rates than conventional mortgages and often require additional fees such as origination points, closing costs, appraisal fees, etc.
Additionally, since these types of loans are typically secured by the property itself they also carry greater risk if you fail to make timely payments or default on your loan entirely.
When considering whether or not a hard money loan is right for you there are several factors that should be taken into account:
• Do you need fast access to capital? Hard money lenders typically fund projects much faster than banks do so if time is of the essence then this could be a viable option for you.
• Do you have sufficient equity in your property? Most hard money lenders will only lend up to 70% of the after repair value (ARV) so having enough equity in your project can help ensure that you qualify for one of these types of loans.
• Can you afford the monthly payments? Since hard money loans come with higher interest rates it’s important that you take into consideration how much extra cash flow each month will cost before committing yourself financially long term.
Overall, hard money loans can provide real estate investors with quick access to capital but they should only be considered when other financing options aren’t available or when time is essential in order to close on an investment opportunity quickly and efficiently.
If used correctly these types of investments can help finance profitable projects, but it’s important that borrowers consider all their options carefully before making any decisions about taking out a loan like this one.
My Hard Money Loan Program
Back in the day, I owned a mortgage company that worked exclusively with real estate investors. I was a hard money lender funding short-term acquisition loans for properties in Colorado.
My criteria was:
- Loan maximum of 70% after repair appraised value (ARV).
- 15% interest.
- 4 points
- Minimum credit score 660.
- 6 month terms with extensions considered for a fee.
- We fund 100% loan to cost which includes the purchase, closing fees and cost of repairs.
It was an expensive loan but as long as borrowers were below 70% of ARV, they could get 100% financing!
FAQs in Relation to What Are Hard Money Loans
What is an example of a hard money loan?
It typically has higher interest rates than traditional loans and is often used to finance projects that require quick funding or have difficulty obtaining traditional financing. Hard money loans are usually funded by private investors, not banks, and are based on the value of the property being used as collateral rather than creditworthiness or income. Borrowers must be prepared to pay back these loans quickly, usually within one year, with high interest rates making them an expensive option for long-term investments.
What are the risks of a hard money loan?
They can be a great option for investors looking to quickly acquire or refinance properties, but they come with some risks. The most significant risk is that the borrower may not be able to repay the loan on time and in full due to changes in market conditions or other factors. Additionally, hard money lenders often require a higher down payment than traditional lenders and have stricter repayment terms. Finally, borrowers should be aware of any prepayment penalties associated with their loan agreement as these could add up over time if the loan is paid off early.
What is a hard money loan used for?
It is typically used by real estate investors to purchase and/or renovate an investment property. The terms of the loan are usually more stringent than traditional loans, with higher interest rates and shorter repayment periods. Hard money loans are often used when time is of the essence or when other financing options may not be available due to credit issues or lack of collateral. They can also be useful for investors who need quick access to capital in order to take advantage of opportunities that require immediate action.
Why is it called a hard money loan?
A hard money loan is a type of financing secured by real estate assets. It is called “hard” because it typically has higher interest rates and shorter repayment terms than traditional bank loans, making it more difficult to obtain. Hard money loans are often used when borrowers need quick access to capital or have difficulty qualifying for other types of financing due to credit issues or lack of collateral. They can also be used as bridge loans for short-term projects that require immediate funding but may not qualify for long-term financing from banks.
In conclusion, hard money loans can be a great option for real estate investors who need quick access to capital and are willing to accept the associated fees and potential pitfalls.
It is important to understand what a hard money loan is, how you qualify for one, what fees come with it, and any potential risks before taking out this type of loan.
With careful consideration of these factors, real estate investors may find that hard money loans are an effective way to finance their projects.
Want to avoid using hard money?
Learn to raise and manage your own private money with my course, Getting the Money.