There seems to be a ton of confusion when it comes to hard money loans and hard money lenders these days. Most of the confusion seems to be in the thought that if you find a deal and have no money, someone will fund it for you. This is one of the biggest issues with hard money these days. While there are some local guys that might consider funding your purchase/rehab/closing costs and even interest payments, thereby allowing you to come out of pocket with no money, this is not the norm.
Hard Money Lenders typically allow Real Estate Investors to borrow a certain percentage of the purchase price and rehab costs. You will need to have some skin in the game (at the very least closing costs) and the ability to service the debt monthly. Most of these loans are asset based loans, while there is a growing trend of Hard Money Lenders looking at credit. Many investors wonder why this is. The main reason is that lenders are finding many loans they made over the last 2 years took longer to get paid off than the initial term they were issued for. So now lenders want to know if you can’t pay the loan off in the time given, is there a possibility of you refinancing with a bank once the rehab work is completed?
Why are some lenders lending on the as-is value only and not the ARV (after repair value)?
Lending on the after repair value means the lender is lending more than the property is worth. Typically, hard money lenders lend in more than one state/area, while private lenders are usually local lenders. It is hard for a hard money lender to have a handle on every market they lend in, making lending more than the purchase price a very risky loan for them. What many borrowers don’t realize is that once they start the demo on the property, it is worth even less than what they paid for it, putting the lender in a lower loan to value position if the borrower walks at that point.
Hard Money Loans are not cheap!
Hard money is much more expensive than conventional financing. However you are paying for the ability to get financing on properties that most banks will just not finance. Also, if you are refinancing or just doing a purchase with no rehab, many loans are available with no credit checks and no income checks. You are paying for the ability to get a loan based on the property itself. Hard Money Lenders are making loans to people and on properties that bank would never consider lending money to! You are also paying for speed! If you have a property you need to close in 7, 10, 14 days – do you think your bank would meet those times for a conventional loan? You are paying for the availability of funds in a short time frame.
Most lenders claim to fund in a week or less – is this really possible?
Yes it is possible. Hardmoneyman.com does close many of their loans in 5-7 days. However, this does take a borrower that cooperates. Many borrowers pick and choose the documentation they want to send back off the list provided by the lender. Those that send a complete file first time out, and those that submit documents when requested by the lender within a few hours of the request usually close in a week. It is when borrowers don’t submit everything as requested on time, and then on day 6 ask if were closing tomorrow?? Make sure you send the lender ONLY the requested documents, that they are completed and up to date, and that will help you close in that 1 week timeframe.
Remember – its called hard money, not cheap money and not free money. But if used correctly, hard money loansare a valuable resource for all investors!!