What is a hard money loan?
A Hard Money loan is generally a short term bridge loan utilizing, in many cases, private investor money to fund the loan.
Why do they call it hard money?
Although many explanations exist as to the term, it is commonly believed that Hard Money lenders place more importance on the “hard” assets available (ie: the real estate or property used as collateral) than on the borrower’s credit or income. Heavy consideration is placed upon the equity a borrower holds in the real estate, and should the equity investment requirements not be there, we are also able to cross-collateralize the loan with other borrower properties and create a winning solution.
What are the interest rates?
Interest Rates on Hard Money loans, which are usually high when compared to traditional lending sources, are typically less costly than taking on financial partners or losing the real estate opportunity altogether. Rates can generally range from 8% to 12%. The rate is determined by looking at a combination of factors, such as (a) loan-to-value “LTV” ratio, (b) strength of the borrower, (c) condition/desirability of the property, (d) lien position, and (e) actual borrower cash-in contribution or owner equity.
What are the fees involved?
Loan Fees on Hard Money loans generally range from 2% to 3% of the total loan amount plus a Document Preparation Fee, which will vary based on the complexity of the transaction. There are also third party fees involved, such as title insurance, escrow closing fee, credit report, flood certification fee, and account servicing fees. We do not charge hidden junk fees.
Can the fees be paid from the proceeds of the Hard Money loan?
Yes, as long as there is enough equity in the project. Most often all fees are paid from the loan proceeds.
Why would anyone seek a Hard Money loan when traditional lending sources charge lower interest rates and loan fees?
There are many reasons why a borrower would choose to use a Private or Hard Money loan over less expensive traditional lender financing. Speed of funding is the most common reason. Institutional lenders can take more than 30-45 days (residential), 90-120 days (commercial), and 180 days (development, construction) to fund a loan. Hard Money loans can fund as quickly as 24 hours under certain conditions, but typically fund within two weeks. Property type is another common reason for utilizing a Hard Money loan. For example, banks are unable to make most types of raw land loans, so Hard Money loans are practically the exclusive source of financing for raw land. Hard Money loans can allow certain borrowers or properties that don’t initially meet conventional lender guidelines to be brought into compliance with these financing guidelines, or eventually sold. Hard Money financing is often used for acquisitions, development, turnaround situations, foreclosure bailouts, and bankruptcies; and for all types of real estate, such as raw land, commercial, construction, land development, multi-family, office, retail, industrial, single family homes and manufactured homes.
How long do Hard Money loans last?
Hard Money loans are typically short in term, and can run from 6 months to 5 years, depending on the circumstances. With hard money lending, not only can longer terms become expensive, but the goal is typically to have the borrower in and out of the loan as soon as possible.
Do Hard Money loans have prepayment penalties?
Sometimes private investor funded loans may require an “interest guarantee” of 3 to 4 months to insure a specific guaranteed return. This is not the same as a “prepayment penalty” which requires a set number of months (usually 6) to be paid if the loan pays off within a given period of time; usually within the first year. With an interest guarantee clause, the interest already paid will be deducted from the guarantee amount. For example, with a 4 month interest guarantee clause, if the borrower repays the loan in 3 months, only one additional month of interest would be due from the borrower. After the guarantee period, in this case 4 months, the guarantee is no longer applicable. This is much different than a prepayment penalty, in which the full prepayment penalty could be imposed at the payoff, regardless of how much interest has been paid by the borrower to date.
How quickly can my Hard Money loan close?
Fast closings are often very important in Hard Money loan transactions. We have closed loans within 24 hours when presented with a complete loan package, but we typically take one to two weeks, depending on the loan request.
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