Hard Money

Hard Money Loans: An FAQ

1. What are hard money loans and how do they differ from traditional loans?

Hard money loans are short-term, private loans secured by real estate. Unlike traditional loans from banks, hard money loans are primarily based on the value of the property rather than the borrower’s creditworthiness. They feature higher interest rates (typically 12%-18%) and often involve points and prepayment penalties. These loans are commonly used by real estate investors for quick financing of projects like flips or renovations.

2. How is the loan amount determined for a hard money loan?

Hard money lenders typically base the loan amount on the “after repaired value” (ARV) of the property. This means they consider the property’s potential value after renovations are completed, rather than its current market value. Lenders typically offer a loan-to-value (LTV) ratio of 50% to 65% of the ARV.

3. What are the typical terms and conditions of a hard money loan?

  • Term: 1 to 2 years
  • Interest Rate: 12% to 18% (or higher depending on state usury laws)
  • Payments: Usually interest-only, keeping monthly payments lower
  • Points: 5% to 10% of the loan amount charged upfront (may vary)
  • Prepayment Penalty: Common, often 3 months of interest

4. Can hard money loans cover repair costs?

Yes, many hard money lenders provide funds for repairs. These funds are typically held in an escrow account and disbursed as repairs are completed according to a pre-agreed schedule. This allows investors to finance both the purchase and renovation of a property.

5. Do I need good credit to qualify for a hard money loan?

Hard money loans are less focused on credit history compared to traditional loans. Many lenders don’t even check credit scores. They are more concerned with the collateral (the property) as their security. However, some lenders may have minimum credit score requirements.

6. What are the advantages of using hard money loans for real estate investing?

  • Fast Approval and Funding: Hard money loans close quickly, enabling investors to seize time-sensitive opportunities.
  • Flexible Underwriting: Less stringent requirements compared to traditional loans, making it easier for investors with less-than-perfect credit or unique situations to qualify.
  • Funding for Repairs: Allows investors to finance the purchase and renovation of a property with a single loan.

7. What documents are typically required for a hard money loan?

  • Appraisal (“Subject To” appraisal for ARV)
  • Hazard insurance policy
  • Termite report (depending on location)
  • Lender’s title insurance policy
  • Note and mortgage
  • Assignment of Rents form
  • Escrow agreement for repair funds

8. Can I use hard money loans to finance buyers of my wholesale properties?

Yes, connecting your wholesale buyers with hard money lenders can expedite sales and potentially increase your profit. However, be cautious about who you refer to your lenders to protect your reputation and maintain a good relationship with them. Consider using non-circumvention agreements with both the lender and buyer to prevent them from bypassing you in future deals.