hard money Lenders and hard money Loans
hard money loans, are unlike conventional bank financing. These loans are considered, “privately funded loans,” as the requirements vary from one lender to the next. Lenders are concerned with one thing: the collateral, and equity protection. Rates are higher than conventional loans, but funding times are faster, and loan criteria and repayments terms can be individually tailored.
Lenders are useful when time is off the essence. Lenders can help you capitalize on critical opportunities – with fast loans, with no credit/income verification checks. If you can’t get funding through conventional means – then consider speaking to a lender. It’s a great option for short term financing.
Typically, it can take 5-10 days to get funding for a loan. Traditional banks take anywhere from 4-8 weeks. Lenders like Delancey Street can fund faster because our loans are funded directly. That means less paperwork, and less red tape involved in funding the loan. Moreover, you can get a hard money loan even if you have bad credit! Credit is not an issue. You should, however, have a plan on how you will repay the loan. Our funding criteria is based on equity in the property and your payment repayment plan. We make loans to foreign nationals, and entities – who have no credit. Typically, we’ll ask you for an appraisal to help us understand the loan to value ratio.
Understanding hard money Loans
Life is simpler if you can get a mortgage for your case. Unfortunately, sometimes it’s not that easy. Sometimes you need money ASAP for a real estate purchase. If you don’t qualify for a conventional mortgage, then we can help you. Loans are one of many solutions, available for unconventional borrowers. Are they right for you? If not, what’s a better option? Keep reading, and we’ll educate you on loans, and how to make an informed decision.
These loans are a type of real estate loan. They are based off the value of the collateral(the property itself), rather than your capability to repay the loan. Here are some types of loans:
- Bridge Loans. These are used to allow someone to buy property quickly, with the goal of reselling it, or refinancing it. These allow someone to buy a new property ASAP.
- Fix and Flip Loans. These types of loans allow someone to buy a rehab property, and then fi it up quickly so it can resold later.
- Owner Occupied Loans. These loans allow consumers who don’t qualify for other types of financing to get a property for themselves.
- Construction Loans. These loans allow developers to get started on new construction projects, with the intent of refinancing, or selling it quickly.
How do loans work
These types of loans aren’t available to simply everyone. Most lenders do not give out hard loans for non-investment reasons. If your planning to use loans to fund your own private home, then that’s unlikely. Some lenders might make loans to consumers, but this can result in numerous problems. Loans are only given for a short period of time – usually 4-24 months. Most loans only require you to make interest payments, or in some cases – no payment at all. Rather than making payments each month towards the principal and interest – loans give you more flexibility. Hard money loans carry many perks, which hold appeal to investors: you get quick financing, short loan term lengths, and an easy application process.
It’s very common for lenders to expect you to bring some of your own money to the deal. Each lender requires a certain amount of money based on the loan to value ratio, or the after repair value ratio of the property. For example, if a lender will give you a loan based on 80% off the LTV ratio, and you want to purchase a house worth $100,000 – then you need to have $20,000 of your own cash.
How is the loan paid off
The loan is paid off in one swoop at the end – with a balloon payment. This covers the entire principle, interest, and any fees. In some cases, lenders might charge you some initial points before the loan begins. It all depends on the deal.
Hard money loans versus traditional bank loans
Hard money and traditional bank loan are different. They are tools for buying property, but that’s where similarities end. Loans are given out by private individuals and companies. Each loan can carry different terms, – not only from another loan, but also from a traditional bank loan. Some have short repayment periods, some have high interest rates. Compared with conventional loans, they are much easier to qualify for and be approved for. The underwriting standards for consumer loans are similar to traditional mortgages.
– lenders ignore bad credit, foreclosures, or bankruptcies, or other issues that prevent you from getting a traditional mortgage.
– lenders focus on the value of your real estate which serves as collateral for the loan, and they care about your loan to value ratio.
-Regular banks focus on the borrower’s credit rating and income.
Most lenders will not give you money to purchase your primary residence, because lenders will have to abide by Dodd-Frank regulation, which requires them to verify a borrower’s capability to repay the loan. Lenders will have to analyze the person’s income, and expenses, in order to make sure the debt to income ratio isn’t too high. Additionally, if a lender loans to private individuals, they are required to undergo licensing requirements with the National Multistate Licensing System and Registry. The requires both federal test and licensing, and a state test – so it’s a very expensive process. It’s a reason why most lender don’t lend to owner occupied homes.
Should you use a loan?
There are many benefits of loans. The term “hard,” in is a misnomer. These loan types provide a simple way for real estate investors to get funding.
- Get quick money. Instead of spending weeks/months to to get a loan – a real estate investor can get in a week, or less.
- Lenient. Regular mortgages have stringent standards. But lenders focus on the collateral used for the loan.
- Flexible terms. You’re working with private individuals and firms – not massive banks. This means lenders are more likely to create custom loans, tailor made, to your situation.
- Increased opportunities. We provide you with large amounts of fast cash. It can mean the difference between missing a deal, or not.
Pitfalls of loans
Hard money loans can provide a lot of benefits. Here are some of the downsides of them.
- High interest rates. Interest rates for loans regularly go into the double digits. For example, if you take out a $100,000 30 year mortgage, at 7% APR, you’d pay $77,854 more in interest payments than a conventional mortgage which has a 3.5% APR interest over the duration of the loan. Most hard money loans are made over 3-24 month period, as opposed to traditional loans which are paid off over 30 years.
- Lack of regulations. Compared to traditional mortgages, there is very little regulation of loans. It’s critical to know what you’re doing, and who you’re dealing with.
- High fees. lenders have high interest rates, in addition to a wide array of fees such as origination fees, underwriting fees, early payment penalties, etc.
- Term. loans are paid over a shorter period of time, such as 1-2 years. You need to have the money to repay the loan, or apply for an extension, or refinance, to pay back the loan. Some lenders may allow you more time, but will increase the interest rate.
- Harder to refinance. Some traditional lenders require you to own the property for a certain minimum length before they’ll refinance your property. This can cause issues if your loan is due before you are able to refinance the loan.
When to consider getting a 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. 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. 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 loan.
When to avoid 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 loan is due before you sell it, then you’ll need to refinance, or be foreclosed upon by the 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 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. Loans are expensive. Make sure you look into other options always.