Hard money loans are also referred to as private loans, fix and flip loans, rehab loans, bridge loans, or construction loans. This type of lending is a form of real estate investment financing that allows investors to purchase and repair a property without being locked to the conventional standards that are often required by banks or mortgage brokers. With a hard money loan, investors are provided maximum leverage for a distressed property while also funding repairs and renovations. When working with a hard money lender, investors can finance their residential investment property as if they were paying cash.
You find the perfect investment that you would like to rehab or flip and decide to write up an offer. You plan to finance with a hard money lender like Kenwood Mortgage, but having never done one of these before, you are wondering what happens after you get that signed purchase contract.
Here’s a quick look at the hard money lending process:
Some may loan a percentage based on appraised value, while others will loan a percentage based on the purchase price. It is better to find the lenders that will loan on appraised value like Kenwood Mortgage.
The hard money lender will give you a breakdown of your fees along with their terms, including:
- Loan Points
- Closing Costs (Escrow Fees, Document Fees, Notary Fees)
- Interest Amount
A typical hard money lender might say:
I will loan 60% of ARV (appraised repaired value), with 5 points, 500 in document fees and a 6 month interest only balloon payment loan at 10%.
They will loan you up to 60% ($120,000). To get the hard money loan you will pay $6,000 in points + $500 in document fees, and you will pay $1,167.67 on the loan, until you sell the property or until 6 months is up. They will take a trust deed and make you sign the other documents like you would with a typical mortgage loan.
Before you present a property, you should get familiar with local lenders and pre-qualify with them. Their lending requirements are often-times different than that of a traditional mortgage lender. Hard money lenders are usually most worried about the amount of cash you have, your level of experience, the specific deal and your credit.
Here’s the typical hard money lending process:
- Pre-qualify: talk to the lender and see what they require of you and your deal.
- Find and put a good deal under contract.
- Call the hard money lender and inform them of what your contract price is, the estimated cost of the repairs, and what you think the ARV value is.
- The lender will either send their appraiser or give you an approved list of appraisers, and you will then get the property appraised.
- They may request some of the escrow documents to verify the paperwork.
- They will agree or disagree to fund the loan and will tell you what amount and under what terms it will be.
- You close the loan — In many ways, its just like a conventional loan in that you do the closing at a title company or lawyer’s office. The lender puts the loan amount into escrow at the title company. The buyer might have to put in money or might get money back, depending on the deal.