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. HM 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. HM loans are referred to as a last resort, depending on your exact situation. Experienced investors know that if you want a property – you have to move fast. When you want to buy a property within a few days, a loan is the only way to do it. Traditional loans take time. It’s impossible to get a traditional loan approved in 3-12 days. Most traditional lenders take 1-3 months to approve you loan. Because loans are secured by real estate, they come with different guidelines. For example, credit score doesn’t matter in a HM loan. The lender only looks at your collateral. Traditional lenders however, will never give a loan based on collateral only. In contrast, HM lenders will. Traditional lenders care about your credit – whereas HM lenders do not.
The funds in a loan come from private lenders who are interested in lending their money for interest. HM lenders charge a higher than average interest rate – compared to traditional institutions. The source of the funds can come from an individual, or a pool of investors, who invest in your loan. Often, many will pool their money and work with a commercial lending asset manager, or through a broker who facilitates the loan.
As a result, this loan is used mostly by real estate investors who are interested in conducting transactions and need a source of money to leverage. Banks tend to not loan to investors, because banks want to make sure they’ll get paid back. Banks look at things like collateral, personal finances, and your credit score. HM lenders will often look at the LTV – loan to value – ratio, when evaluating your deal. Lenders prefer a low LTV – no more than 70-80%.
Hard money lenders are useful when time is off the essence. HM 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 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.
Borrowers should consider a loan, instead of a traditional lender, when you need quick access. Gaining access to this capital comes at a higher interest rate because the investor wants a higher ROI than investing it into bonds, savings account, etc. Moreover, the investor is aware a traditional lender won’t lend to you – and thus, he/she is taking on additional risk by investing in your project. Only turn to a HM lender if you REALLY need this money.
While you can go to a traditional lender instead of a lender, in most cases if you’re looking for a loan it’s because you have a questionable financial history. Banks look for collateral, good credit, and cash flow. Moreover banks will make you go through a rigorous application process, and take time to make a decision.
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.
Why would a hard money loan be denied?
HM lenders are considered flexible, and open minded, in contrast to traditional lenders. While it’s true that HM 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 HM 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 HM lenders want to see you have “skin in the game.” HM 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 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 lender understands you have a plan and won’t abandon the project.
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 HM 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 lenders. Many 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.
Many 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.
Can hard money lenders only help distressed borrowers?
Not at all. While it is true, some borrowers are in distress when looking for HM – in many cases it’s investors who turn to HM.
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 HM 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 loans for real estate investment properties. We do not lend on properties that are owner-occupied.
Hard money loans versus traditional bank loans
HM and traditional loans are similar, yet very different. HM loans are tools used for buying property. These loans are given out by private lenders. Because there is no standard set of guidelines for HM loans, each loan has different terms. It’s common for HM lenders to offer different terms and interest rates for the same type of investment, to different real estate investors. In contrast to traditional loans, HM 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.
- HM lenders ignore bad credit, bankruptcies, or other issues that would normally prevent you from getting a traditional mortgage.
- HM lenders care about the value of your real estate property. HM 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 HM 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, HM 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 HM 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 HM loans work
HM loans aren’t available to everyone. Typically, they can only be used for investment purposes. If you plan on using a HM loan to buy your own home, then it’s unlikely you’ll get approved. HM loans are typically given for a term of 6-24 months only. While it’s possible to get a HM loan for a period of time greater than this, it’s unlikely to be cheap – or easy. Most HM 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. HM is great if you a short term loan that is approved fast.
Most traditional lenders are ok approving 80-90% LTV loans. In contrast, HM lenders expect you to bring some of your own money to the deal. Each HM 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 HM 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 HM 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 HM lenders to charge pre-payment penalties. The purpose of these penalties is to guarantee the HM lender a specific profit on their loan.
What are the benefits of hard money loans
HM loans have numerous benefits. The biggest is that borrowers can get money without going through the hurdles traditional lenders have. HM loans come from private lenders, and thus, there are many guidelines. HM 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 lender – it’s likely your future loans can be approved within literally hours. Needless to say, loans are great for people who need bridge funding in timely manner.
HM loans are extremely flexible compared to traditional loans. Lenders do not subject you to rigid guidelines, unlike traditional banks. HM 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 loans?
Every single 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 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 lenders lend on?
HM 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 HM 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 HM loans.
Is a hard loan right for me?
There’s a number of benefits when it comes to HM loans. Bottom line, HM loans provide investors with a quick, and fast, way of getting funding for their next project.
- HM is quick money. Instead of spending 2-3 months getting a loan, you can get a HM loan approved in literally days.
- HM lenders are lenient, compared to traditional lenders that have stringent standards. Most HM 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 HM 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 HM loans. By being able to close a deal within 5-10 days thanks to fast cash provided by HM, you’re able to secure deals fast.