Why would an investor want to choose a hard money loan over traditional lending?
Residential rehab presents unique financing challenges for investors. You need a lot of capital up front, and enough on the back-end to make sure your project doesn’t flounder. A loan is usually required to jumpstart your rehab and get work done. But conventional loans require a lengthy approval process, strict adherence to approval criteria, and significant down payments that leave the investor strapped for cash once they have acquired the property and renovations begin. Hard money loans were developed to fill this gap in the lending market.
What differentiates a good hard money lender from a bad one?
A good lender is loaning to help instigate development and build positive relationships with real estate developers. Often, developers will work with the same lender over the years on their residential rehab projects, and develop a trusting, mutually beneficial working relationship. However, before committing to a lender, it’s vital to make sure you’re working with a competent lender, as well as to consider whether or not hard money is the right option for your development.
Is a hard money loan the right option for someone new to the field?
In a word, yes. A hard money loan is just right for a new investor in residential rehab as it is for an old hand. It’s the right option for anyone who has a promising investment lined up and needs a short term loan. Several common loan types include:
What does a lender look for when making a hard money loan?
Hard money lenders have the freedom to set their own criteria for loan approval. Banks are under stricter regulatory constraint and have to follow FHA guidelines. Since many distressed properties do not meet FHA guidelines, it can be virtually impossible for residential rehab developers to acquire a traditional bank loan written through Fannie Mae or Freddy Mac.
How will rising federal interest rates impact the hard money market?
One can never forecast with absolute accuracy the Fed’s next strategic move with our fiscal policy, but keeping a close eye on their public statements can provide clues that economists and financial analysts decrypt for the public. As of March, experts at Time Money have predicted a rate hike as early as June this year, following a statement by Janet Yellen and her colleagues at the Federal Reserve.
How is the Loan-to-Value ratio determined for hard money loans?
With a hard money loan, a borrower can borrow 65-75% of the property value. With most hard money lenders, the loan to value is determined through either an appraisal or a broker opinion of value. A broker’s price opinion might be hired by the hard money lender to assess the property and estimate what the potential appraisal value of a property might be. These brokers assist with the hard money approval process, because they can provide a quicker answer than a traditional appraisal, enabling your lender to more quickly approve your loan application. The high cost and delay associated with opting for a full appraisal is more likely to slow down the approval process, and negate one of the greatest benefits of a hard money loan: quick action.
What are some of the uses for hard money loans?
Bridge loans are a temporary loan, often used by the investor to purchase, build, or fix-and-flip a home or commercial property. These loans can give small businesses short-term capital to work during the time it takes to renovate a property, find tenants or establish a business, or sell the renovated property. Hard money bridge loans are able to sidestep the restrictions that conventional lenders are bound to, making it much easier for investors to secure funds, and the quick approval process is vital to keep up with the fast pace of the market.
Are there any up-front fees prior to funding?
Like any conventional lender, hard money lenders do charge a loan fee prior to funding. This fee is measure in “points”- one point is equivalent to one percent of the loan value. The number of points could depend on the complexity of your loan, and the agreement you reach with your lender.
What is the criteria for evaluating my property?
Hard money lenders will generally take a much more comprehensive approach to evaluating potential loans than a conventional lender. Since hard money lenders have a greater freedom from regulation and federal mortgage rates, they can rely more heavily on the actual investment potential of the property and the borrower’s experience with real estate development.
How do hard money loan interest rates compare to that of traditional loans?
The lender’s interest rate for a hard money loan is likely going to be between 8 and 18 percent of the loan’s value. For a conventional 30-year fixed rate mortgage, a borrower in today’s market is going to be looking at an interest rate of around 4.125%. However, a 30-year mortgage is actually not really comparable to a hard money loan, and the two types of loans offer different advantages to the borrower. The hard money loan offers many pragmatic advantages for investors who need quick approval to finance a residential rehab or fix & flip development, or to begin ground-up construction.