Empowering Entrepreneurs

Are hard money loans only for distressed borrowers?

Not at all. While it is true, some borrowers are in distress when looking for hard money – in many cases it’s investors who turn to hard money.

Are there any hard money loan application fees or anything?

No. We don’t believe in application fees. We believe many lenders who charge application fees are often “middle-men,” who are simply looking to make money by charging application fees. They are not actually interested in funding your deal.

Can you transition from a hard money loan to a bank loan?

Yes, it’s 100% possible. Many real estate investors often use hard money loans to buy a property. They wait for 6-12 months, and then refinance the property with a traditional bank loan. Because you’ve bought the property, you can now “wait,” for the bank to take 2-3 months to approve your loan. 

Do you lend on owner-occupied properties?

Delancey Street only provides hard money loans for real estate investment properties. We do not lend on properties that are owner-occupied. 

Hard money loans versus traditional bank loans

Hard money and traditional loans are similar, yet very different. Hard money loans are tools used for buying property. These loans are given out by private lenders. Because there is no standard set of guidelines for hard money loans, each loan has different terms. It’s common for hard money lenders to offer different terms and interest rates for the same type of investment, to different real estate investors. In contrast to traditional loans, hard money loans have short repayment periods and higher interest rates. Compared to conventional loans, they are much easier to qualify for, and to be approved for. 

• Hard money lenders ignore bad credit, bankruptcies, or other issues that would normally prevent you from getting a traditional mortgage.
• Hard money lenders care about the value of your real estate property. Hard money lenders are collateral focused, due to the nature of the loan. They care exclusively about whether the collateral can be liquidated to cover the loan amount.
• Traditional loans focus on your credit rating and capability of repaying the loan based on income. 

Most hard money lenders will not give you money to purchase a primary residence, whereas traditional lenders will. Traditional lenders look at your income, expenses, and debt to income ratio in order to make sure you can repay the loan. In addition, traditional lenders have to be licensed by their state authorities. There are federal tests and licensing requirements, in addition to state tests. It’s an expensive process. In contrast, hard money lenders don’t face such requirements. 

Does credit score matter for a hard money loan?

No. We don’t look at your credit score. We only care about the investment property. We look at the specifics of your deal, and focus our decision making process on whether or not we think the deal will “work.” Delancey Street is less concerned about your financial history, and more concerned about the deal itself. Typically, we look to see how much money the deal can realistically make – based on data – and try to understand whether or not the real estate investor has the skills to pull it off. 

How can I get pre-approved for a hard money loan?

Real estate investors who have established themselves as trustworthy are eligible for our pre-approval process. We’re very transparent and straightforward, and can provide proof of funds for investors who work with us. 

How do hard money loans work

Hard money loans aren’t available to everyone. Typically, they can only be used for investment purposes. If you plan on using a hard money loan to buy your own home, then it’s unlikely you’ll get approved. Hard money loans are typically given for a term of 6-24 months only. While it’s possible to get a hard money loan for a period of time greater than this, it’s unlikely to be cheap – or easy. Most hard money lenders will expect a balloon payment at the end of the loan for the principal and interest. Rather than making payments each month (like a traditional lender would expect), this gives you greater freedom. Hard money is great if you a short term loan that is approved fast. 

Most traditional lenders are ok approving 80-90% LTV loans. In contrast, hard money lenders expect you to bring some of your own money to the deal. Each hard money lender will require you to bring at least 20-30% of the overall loan amount to the table. Most lenders lend at around 50-60% LTV. Anything greater than that will generally involve greater scrutiny. 

How fast can a hard money loan be approved?

At Delancey Street, we firmly believe we’re partners first. We treat you how we’d want to be treated and that means being transparent and honest with you at every step. It’s hard to say you’ll get approved in 24 hours guaranteed. It’s simply impossible to make such claims. What we can promise you is never to play games, or delaying the process. We use a very sophisticated algorithm to evaluate potential deals, and give answers quicker than other hard money lenders. The faster you send us the info, the quicker we can evaluate and fund it. It’s common for real estate investors to get a conditional approval within 24-48 hours of us reviewing their application. 

How much do hard money lenders typically charge?

Most hard money lenders charge interest rates anywhere from 7% to 12%. They may also charge origination fees which range from 1-3%. In addition, it’s not uncommon for hard money lenders to charge pre-payment penalties. The purpose of these penalties is to guarantee the hard money lender a specific profit on their loan. 

What are the benefits of hard money loans

Hard money loans have numerous benefits. The biggest is that borrowers can get money without going through the hurdles traditional lenders have. Hard money loans come from private lenders, and thus, there are many guidelines. Hard money is good for emergency funding situations, because lenders care only about the value of the collateral. Traditional lenders focus on your ability to repay the loan. This is huge, because it changes how the deal is evaluated. Once you’ve got a good relationship with your hard money lender – it’s likely your future loans can be approved within literally hours. Needless to say, hard money loans are great for people who need bridge funding in timely manner. 

Hard money loans are extremely flexible compared to traditional loans. Lenders do not subject you to rigid guidelines, unlike traditional banks. Hard money lenders are giving you money because they’ve assessed your collateral and have decided the value of the property justifies the loan amount. 

What are your fees for hard money loans?

Every single hard money loan is different. It’s hard to give a cookie cutter answer on what the fees will be. As a lender, we charge between 8-12% interest. In some cases, we charge points upfront. The fees we charge are based entirely on the risk of the loan, and the length of the loan. If a loan is risky, we charge a fee commensurate to the risk. Bottom line, we are transparent and always fair. We never want to overcharge, and we always focus on offering our clients every opportunity possible to show us ways the risk is less on the loan. 

What does Delancey Street do besides hard money loans?

Delancey Street’s primary focus is providing financial solutions. We engineer creative financing methodologies to help entrepreneurs achieve their goals. For example, we offer loans against Bitcoins – where the coins are used as collateral for fiat currency loans. In addition, we conduct transactions like reverse mergers – where we help take companies public. These additional services are part of our core philosophy of handling complex transactions, and coming up with cohesive strategies that accomplish the goals of the entrepreneur.

What kind of property do hard money lenders lend on?

Hard money lenders will lend on both residential and commercial property. Many will NOT lend on owner-occupied residences, due to the laws and restrictions. Examples of commercial properties include, but are not limited to: industrial buildings, shopping centers, office buildings, offices of all sorts, etc. Some hard money lenders may even invest in raw land, which is slated for development. Vacation homes, are considered owner occupied, and thus may not be financeable by hard money loans.

Is a hard money loan right for me?

There’s a number of benefits when it comes to hard money loans. Bottom line, hard money loans provide investors with a quick, and fast, way of getting funding for their next project.

• Hard money is quick money. Instead of spending 2-3 months getting a loan, you can get a hard money loan approved in literally days. 
• Hard money lenders are lenient, compared to traditional lenders that have stringent standards. Most hard money lenders focus on the collateral, not your ability to repay the loan. As a result, they are able to be creative when it comes to tailoring a loan for you. 
• Flexible terms is one of the reasons many people turn to hard money lenders. You are working with a private lender, not a massive bank – which means you can get a loan that is right for you. It means you can get a tailor made loan, unique to your situation.
• Increased opportunities come from hard money loans. By being able to close a deal within 5-10 days thanks to fast cash provided by hard money, you’re able to secure deals fast. 

Is an appraisal needed?

Appraisals are usually required for most loans. It protects everyone involved in the transaction, including both the borrower and lender. It’s one of the last steps in the application and underwriting process. In some cases we may not ask for them if we feel comfortable with the assessment and condition of the property. We usually only ask for an appraisal after the borrower is already approved for their loan, and the deal terms have been accepted. We use the appraisal to make sure the property is in the condition it was represented as. 

What documents do I need for a hard money loan

Typical documents you’ll need are a Note, and a Deed of Trust. Depending on the value of the asset, the hard money lender might ask for documentation such as a personal guarantee from the borrower, past tax returns, proof of income, and assurances that the borrower has access to cash to perform whatever renovation the borrower is intending on doing.

What is the point of the Letter of Intent

The LOI for a hard money loan is to provide a quick way of ensuring both the borrower and hard money lender are in agreement about the terms and conditions. This isn’t legally binding, but it helps create a common set of guidelines that both parties generally adhere and agree to. It prevents miscommunication, or misunderstanding, between the two parties.

What differentiates hard money lenders from bank lenders?

The main difference between banks and hard money lenders is the fact hard money lenders are asset baed lenders. They focus on the collateral associated with the loan. In contrast, traditional banks focus on credit and cash flow. It’s super important to remember hard money loans are not good for the long term. The purpose of a hard money loan is to be a short term loan that gets you the property you’re trying to purchase. Hard money lenders focus on short term loans that reap high profits. If you fail to repay the loan, a hard money lender can foreclose on your property in order to repay his/her loan. 

What credit score do I need to qualify for a hard money loan?

When it comes to hard money loans / private money loans, we don’t look at your credit score. Our primary focus is the potential opportunity in question. We focus exclusively on the LTV, and other facts pertinent to the deal itself. We are more concerned about the viability of the project, than your past history. It’s that simple.

With Interest Rates So Low, Why Use Hard Money?

A lot of people wonder why they should use a hard money loan when interest rates are so low. Here’s the answer: if you’re looking to buy a real estate investment property – it’s super hard to use traditional bank financing. The crash of 2008 occurred in part due to a lot of money being used for real estate investment. When the crash occurred, a lot of banks were stuck holding this “bad debt.” Banks have so much business from traditional lending, such as home loans, etc, they don’t want the risk from commercial business. As a result, even though interest rate are low – it doesn’t REALLY help real estate investors who need funding for their next purchase. In addition, even if traditional lenders decide to help you – it takes too long. Most real estate investors cant wait 60-90 days for a deal to close. Most deals go to investors who can close in 10-12 days. As a result, many real estate investors turn to hard money lenders who can close fast. In todays market, you need to be nimble and quick. Opportunities are few. You need to be able to capitalize on them ASAP, and that means you need a partner who can assess your potential opportunity quickly, and fund it. 

Why shouldn’t you get a hard money loan?

There’s many reasons why a hard money loan is a bad idea. For example, hard money lenders often charge higher interest rates. This is due to the fact lenders think they are taking huge risks by lending on an investment property – and want to be compensated accordingly. High interest rates make hard money loans unattractive for some types of deals. In addition, hard money lenders have shorter terms than traditional lenders – which also makes them unattractive. Institutional lender offer 30 year terms but hard money lenders offer only 1-3 year terms. 

Why does the hard money lender need title insurance

Hard money lenders want title insurance because it protects both the borrower and the lender. In the event there’s any issues with the property, and there are competing claims of ownership for the property – then title insurance helps cover the losses incurred by the party purchasing the property. In some instances where the property is “risky,” due to competing claims, or risks of litigation, Delancey Street may ask for title insurance. 

When to consider getting a hard money loan

Hard money loans are used as investment tools by investors. They are useful in a few situations, such as:

• Unable to get financing elsewhere. Funding real estate investments is tricky. Traditional mortgages are difficult to get under normal situations. Banks are very cautious of making loans for investments, as opposed to loans for residences. As a result, if you’re looking for investment funds – then get a hard money loan.
• You have a poor credit history. Hard money loans are based off the collateral of the investment, not your ability to repay. Loans made to consumers – as opposed to lenders – are based off your ability to repay the loan. This means if you have a poor credit history, or no stable income – then you might not get approved for a loan.
• You need money. Hard money loans are great so you can get money ASAP. Traditional loans take time. Hard money is very fast. If you need to capitalize on an opportunity immediately, then you can get a hard money loan. If you can wait several weeks, then it’s better to get a hard money loan.

When does it make sense for a real estate developer to use a hard money loan?

In our experience, even developers with strong finances and access to bank credit choose to use hard money loans. There are many situations where time is of the essence, and a bank will just take too long. For example, if you need immediate funding for a deadline – then a hard money loan makes more sense. If you have an excellent investment opportunity but don’t have the financial strength to get a bank loan – then a hard money loan makes sense. If you have a bank line of credit, but need a larger loan than is allowed under the existing line of credit – then a hard money loan makes sense.

When to avoid hard money loans

Hard money loans open doors, and can close doors too. Here are situations where you should avoid these types of loans.

• You are in a buyers market. If you want to sell the home after fixing it up, and homes aren’t selling well – then you might fail. If your hard money loan is due before you sell it, then you’ll need to refinance, or be foreclosed upon by the hard money lender.
• You don’t have a refinancing plan in place. Unless you sell your home before the loan comes due, you will have to refinance the hard money loan. You should have a plan in place to refinance the loan, and know what the requirements are to conduct a refinance of the property.
• Other options are available. Hard money loans are expensive. Make sure you look into other options always.

What’s a term sheet

It’s a conditional commitment letter, or a good faith letter. It’s a written expression of interest by a hard money lender in making a loan, and an estimate of the eventual terms of the agreement. It is not a commitment letter. It is not legally binding. It is an encouraging statement, and means you’re in the right direction. If a borrower gets a term sheet, it means the hard money lender is willing to work with the borrower pursuant to the terms mentioned in the term sheet.

What happens if there’s a mechanic’s lien on the property

Mechanics liens are used by construction companies when a property owner fails to pay a contractor for services, or when the general contractor fails to pay sub-contractors. Title insurance doesn’t provide protection against this. Hard money lenders will protect themselves against possible mechanics liens by making sure a loan includes the renovation budget, and that all of the sub-contractors and general contractors sign releases before disbursing funds.

What’s the maximum loan to cost for hard money lenders?

Hard money lenders look at two different measures when looking at deals. They look at LOAN TO COST, and LOAN TO VALUE. Most hard money lenders won’t exceed a loan to cost ratio of 75%. Most hard money lenders will keep their loan to value ratio around 60-65%. Hard money lenders may use the lesser of the LTC or LTV, to assess the risk of a loan.

What to look out for with hard money loans?

Hard money loans can provide a lot of benefits. Here are some of the downsides of them.

• Interest rates are usually high for hard money loans. It’s not uncommon for the interest rate to go into the double digits. For example, if you take a $100,000 30 year mortgage at 7% APR, you’d pay almost $77000 more in interest payments than a traditional mortgage which will have a 3.5% APR. Most hard money loans are made over a 3-24 month periods, as opposed to traditional loans which can be paid off over 30 years.
• Lack of clear regulations is a problem with hard money loans. Compared to traditional mortgages there is very little regulation of hard money loans. 
• Many hard money loans have high fees in addition to high interest rates. For example, hard money lenders might ask for origination fees, underwriting fees, early payment penalties, and more. 
• Hard money loans typically have a shorter term than traditional mortgages. For example, hard money lenders will offer loans over a term of 1-2 years, whereas traditional lenders will give 30 years.
• Some traditional lenders will require you to own the property for a minimum length before agreeing to refinance your property. This can cause issues for you if your hard money loan is due before you are eligible for refinancing the loan. 

Why is the loan term important?

Real estate financing often uses industry jargon and terminology that some applicants are not familiar with. Regardless of the type of loan that you are interested in applying for, you need to have an idea of what loan term you’re looking for. It’s critical, especially for hard money loans – to know what loan term you need to make your business plan work. Generally speaking, loan term is a broad term that describes the length of the loan. It can be used more broadly to describe things like: the loan amount, interest rate, prepayment penalties, etc, but specifically refers to the length of the hard money loan. 

For example, in traditional residential loans – it’s common for the loan term to be 30 years. That means the lender is giving you 30 years to repay the loan. When it comes to hard money, loan terms are usually shorter. Generally, you can expect a hard money lender to offer a loan term of 6-24 months. This timeframe can range from one lender to the next. In addition, some lenders offer you the privilege of extending your loan after the term is over. Some extensions can last from 3-5 years. 

Most residential loans you’re familiar with are fully amortizing. That means the entire loan balance is repaid over the term length. At the end of the loan term, there is no balloon payment. Hard money loans are different. Most hard money loans are interest only, meaning no principal is repaid during the term of the loan. The hard money lender’s principal is repaid at the end of the loan via a large balloon payment. 

Because hard money loans have a shorter loan term, it’s critical borrowers have an exit strategy before they get a loan. There are many options when it comes to exiting, such as refinancing into a traditional loan, or selling the property. It’s important you’re aware of the loan term/due date, in order to avoid potential issues later. Never accept a hard money loan term without having a calendared business plan in place. 

Hard money lenders will typically never issue loan terms until they’ve reviewed your loan proposal. The lender will ask for things like costs to develop/rehab the property, a timeline for completing the work, and more. Hard money lenders know you can’t obtain long term financing in the middle of a major project, and will customize the loan term around that fact.

Why Do Hard Money Lenders Exist?

Hard money lenders server a very specific group of people, i.e. real estate investors. Hard money lending is a form of short term lending, which is secured by real estate. Specifically, the people who use hard money loans are typically real estate investors – typically, those who are being denied a traditional loan due to stringent guidelines. 

Hard money lenders exist because they are fast, and offer loans with little to no headaches. Hard money lenders have a streamlined application system. They expect collateral, and don’t look at your credit score. They focus on your experience, rather than your credit worthiness. If you have a checkered financial past, it’ll be easier to obtain financing by using a hard money loan rather than a conventional loan which is granted based on your credit report. Below are situations where hard money lenders fill a void that traditional lenders don’t touch:

Fix and Flip Loans

Most traditional lenders will not give you a loan for a fix and flip project. If the house is in poor condition, or there’s some other abnormality with the house, then a traditional lender will not give you funding. In addition, most fix and flip potential deals “go fast.” The seller is very motivated to sell the property, and will accept the first offer. Traditional lenders take forever, so by the time the loan is approved – you’ve already lost the property since someone paid cash for it. If you have a hard money lender on your side who can close a loan in 5-10 days, you can get the fix and flip property.

People With Bad Credit

Most traditional lenders look at a borrower’s credit report. They verify your income, and investigate past delinquencies. It means that someone with a checked credit history will have a difficult time, and in some cases never get approved. When this happens, your only option is to work with a hard money lender. While the interest rates for a hard money loan are higher than traditional loans – if the deal makes sense, it might make sense to take the money. 

Bridge Funding

Sometimes, your project goes over-budget and as a result you need additional funding. Some traditional lenders will refuse, because the project isn’t completed. While this can be devastating, a hard money lender might be willing to lend you the funds. Hard money lenders are happy to give money to bridge the gap in funding, and can work with you to fill that void. 

Why would a hard money loan be denied?

Hard money lenders are considered flexible, and open minded, in contrast to traditional lenders. While it’s true that hard money loans have less stringent requirements versus traditional loans, you could still face some pushback. Lenders will look at you, and your experience, and your business plan – very closely. Here are some things that might cause a hard money lender to reject your loan request.

You aren’t putting down enough equity

Applicants who plan on buying a property, or fixing and flipping, need to realize that hard money lenders want to see you have “skin in the game.” Hard money lenders will evaluate your application, and assess the chances of you succeeding. They look to see how much equity you’re putting into the project. Delancey Street looks to see how much of a down payment you’re putting down, and how much risk you’re taking. Our ideal partner has just as much risk as we do. Lenders typically look to see if the applicant has enough cash to cover the down payment on the investment property. It’s important that you be able to demonstrate that you’ll be able to complete the project – financially speaking. Keep in mind that most hard money lenders will only approve an application where the real estate investor is taking some risk/liability on his/her shoulders as well. If you expect a lender to take a 90-100% risk then it’s likely the loan will get denied. It’s important you have enough cash to cover the down payment, and other smaller bills that might arise in the future. Be prepared to show some proof of cash, so the hard money lender understands you have a plan and won’t abandon the project.

Business plan

It’s important you demonstrate to the lender you have plan in place. Lenders want to make sure they’ll get repaid. You have to show your plan, and how you’ll repay the loan in the future. When you accept a hard money loan, you’re agreeing to a loan term – which means the loan has to be repaid within that period of time. If you don’t repay it, you forfeit ownership of the property to the hard money lenders. Many hard money lenders will refuse to lend you if you don’t have an exit strategy. It helps if you have cash reserves, or assets, in place to help cover the balloon payment in the event your plan fails. Most lenders prefer not to seize your collateral and sell it to settle the debt. They would rather get paid, and want to make sure the real estate investor they are working with is prepared to fulfill his obligations. 

Bankruptcy

Many hard money lenders pay no attention to your credit score. However, some might look for things like bankruptcies, which signal you aren’t good with your finances.