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Hard Money Loans NYC
Many people mistakenly think there are no costs or fees. This is incorrect. Like all business owners they have costs they endure in order to do business. Most NYC hard money lenders have the following fees as a part of their investment. An investor might have one, or all, of the following:
Loan Servicing: If the loan isn’t being serviced by you, then you will have to pay either the PML or an outside servicing company. Servicing fees can vary by provider, and can be based on a flat fee, or a % of the original loan. The servicer will be paid for things like negotiating forbearance agreements, foreclosures, advances, loan modifications, or other things related.
Foreclosure: If you as a borrower breach the agreement, then the investor can foreclose your property. The hard money lender has to pay that cost. This can include things like legal fees, fees to a Sherriff, recording fees, and statutory fees. Most promissory notes call for fees advanced to foreclose to be added to the balance of the debt.
Legal Fees/Advisory Fees: Expect to have a large number of legal fees from your attorney. Most investors rely on their PML to assemble the loan docs. On complicated transactions, the investor and PML hire counsel to draft and review all agreements. Often, the borrower pays legal fees at the loan closing.
How do application fees work?
This is a tricky subject when it comes to hard money loans. There are many con men who have made a business from stealing application fee money. That’s why we felt it necessary to discuss this. First – Delancey Street NEVER charges application fees. Application fees for hard money loans are charged by commercial real estate lenders, and commercial mortgage brokers, in order to underwrite the loan. It’s generally used to pay for third party reports, pay for the broker’s time, and the costs associated with arranging a commercial real estate loan. We’ve seen fees range from $500 to $100,000. Depending on the type of project you have, assessing it’s viability can be simple or complicated. For example, if you are simply flipping residential real estate – then it’s easy. But if you’re looking for a hard money loan on a big commercial project, the evaluation criteria vastly change. For example, a prospective hard money lender might look at the appraisal, toxic report, engineering report, title commitment, and many other things. The hard money lender will do his own research and have his own people do it, in order to make sure the findings are accurate. There are costs associated with all of these things – and therefore, they might charge an application fee to cover this. This is a valid reason for a fee.
In contrast, it’s tricky when a mortgage broker charges the same fee. For example, say a mortgage broker charges a $500 fee. It can be assumed this fee is for the broker’s investment of time and effort. The fee is not a guarantee you will get approved. You could get rejected – even if the broker does his job – simply because your project isn’t solvent. Perhaps you have unrealistic projections, or perhaps you misrepresented the value of the property. Just like lawyers and accountants charge for their time – brokers do the same. The problem is when a hard money broker flat out lies to the borrower in order to get the application fee. In some cases, brokers will misrepresent that the deal seems good – just to get the initial fee from the borrower. Later on, the broker says the project isn’t good and keeps the fee. It gets ugly when a broker pretends to be a direct lender and steals a big application fee. In some of the more audacious scams, the broker tells you he’s a direct hard money lender, and quotes you competitive rates and even provides a term sheet which looks legit. He’ll then follow up – asking for a big $25000 application fee to get it started. Later, he disappears with your money, and you never hear from him.
It’s safer to work with a bank, than some mortgage company, when it comes to application fees. All banks require an application fee – so if you’ve applied with a bank, you’ll be ok – probably. Many brokers illegally use the word bank, or banc, in their company name – be careful about that red flag. Never pay for an advance fee until you’ve got a term sheet. If a hard money broker asks for more than $500 as a fee, watch out – you might be a victim. If a bank says they are a direct hard money lender and want a fee larger than $5000, they might be legit. Google both the name of the loan officer and the name of the bank/company, before giving money.
Can portfolio investors use NYC hard money loans?
Portfolio investors are long-term investors who invest in multiple properties at once. These long term investors like conventional mortgages. In general, banks and lending institutions only give out 4-10 mortgages to a single person. If a portfolio investor meets his or her limit, then the only option is to get a hard money loan. Most portfolio investors are highly leveraged, and as a result – rely on hard money loans to make additional purchases. As a result, hard money loans are great for them because hard money lenders only look at the value of your asset. Portfolio investors can use hard money loans to purchase houses in good and bad conditions. If the condition of the house is poor, then the hard money lender can issue a loan based on the after repair value.
NYC Hard money loans vs Conventional
Hard money loans have differences when compared to conventional mortgages. Conventional loans are issued by banks, and have very strict requirements, a longer approval time, a long loan term, lower interest rates and fees, and can be used for family homes, apartments, condos, multi-family units, and commercial property.
Hard money loans are given by NYC hard money lenders; they have fewer requirements, shorter approval time and loan terms, higher interest rates and fees. Below is a comparison that can help you understand.
|NYC Hard Money Loans||Conventional Mortgages|
|Max Loan Amount||90% LTV / 80% ARV||80-95% LTV|
|Minimum Down Payment||10% of LTV, or 20% of ARV||3.5% to 20% LTV|
|Points||2-10 points||0-1 points|
|Loan Term||1-3 years||15-30 years|
|Time to Approval||24 hours||45-60 days|
|Property Type||Residential and Commercial||Residential and Commercial|
The Loan Amount
Conventional mortgages gives loans equal to a % of the house’s closing price. This known as the property’s LTV ratio. Conventional mortgages typically issue loans equal to 80-95% of the house’s closing price. This means that conventional borrowers should anticipate covering a down payment up to 20% of the purchase price. Lenders on the other hand are given by hard money lenders. They issue loans based on the property’s LTV or ARV ratio. NYC Hard Money Lenders issue loans up to 90% of the closing price. The LTV is used when the property is in good condition. ARV, on the other hand is used when the property needs renovations. Hard money lenders will use ARV when an investor is seeking a loan for a fix and flip property.
Conventional mortgages have a 30-60 day timeline for approval. Loans are given for a term of 15-30 years. In contrast, hard money loans offer quicker approval times, and have a term between 1-3 years.
Interest Rates / Fees
Conventional mortgages offer lower interest rates (4-6%). There is usually no hard money lender fees known as points. However of conventional mortgages are expected to cover closing costs, application fees, appraisal fees, and other costs associated with the transfer of property ownership. Interest rates on nyc hard money loans are high, because they are short term and are risky for the hard money lender. Expect interest rates between 7-12%. These loans also have fees of 2-10 points.
Are all hard money loans backed by real estate?
Traditional or institutional financial companies offer a wide range of loan programs, but there are times when you cannot qualify for these loan programs for various reasons. When you cannot get a loan from a bank or a credit union, you may believe that you have no other option except to walk away from your potential investment opportunity. This could mean that you leave an incredibly lucrative opportunity on the table, which is not ideal. When other financing options are not available, consider getting a hard money loan. One of the more common questions that people have about hard money loans is if they are only available for real estate.
A hard money loan is a type of secured financing that is collateralized only by a real asset. Typically, a hard money loan has a very short term, and this may range from a few months to one to two years in some cases. If you are thinking about applying for a hard money loan, after learning that a traditional form of financing is not an option, you need to understand more about the type of collateral that may be used and how the funds can be used.
Traditional loans offered by financial institutions typically have stringent underwriting guidelines. Some of these loan programs may be specifically designed for owner-occupied homes or investment properties, for example. Hard money loans are unique because they are not backed by the government, and they do not need to fit into a pre-determined box of guidelines. These are loans that are funded by private investors, or even by individual investors, with deep pockets. With a hard money loan, the investor will analyze all of the strengths and weaknesses of a loan request individually to determine if the loan makes sense. Many deals can be lucrative and make sense, even if they do not conform to traditional bank underwriting guidelines.
Because hard money lenders can be more creative in their approach to reviewing and approving loan requests than a bank, they are more lenient. The collateral does need to be real estate. However, it could be raw land that you intend to develop, a single-family home that you plan to flip, or even a commercial property that is currently underperforming. Some hard money lenders only offer loans on specific property types, such as residential properties or commercial multi-family properties. Others will consider all scenarios and property types.
One of the things that you may have noticed with traditional bank loans is that only specific scenarios are considered. For example, you must plan to live in a residential home that you are buying, or an apartment building that you are buying as an investment must have a history of 90 percent occupancy for at least the last six to 12 months. If the property needs to be rehabbed, or if you need a land and development loan, your options may be more limited.
Each hard money lender is different, but most will consider a wide range of scenarios. For example, a hard money loan can be used by a flipper to update a home that is currently in very poor condition. It may also be used to buy a run-down apartment complex, renovate it and lease it up. When you request a hard money loan, you need to have a very detailed and strategic plan for the property that you intend to buy. Your plan needs to include a list of expenses to turn it around as well as a timeline for leasing it, selling it or refinancing it with a traditional loan.
What are the requirements to qualify for a hard money loan?
Unlike traditional bank loans, hard money loans have very lenient requirements. For example, a traditional loan may have a very specific minimum credit score requirement for the borrower. For a multi-unit commercial property, it may have a specific debt service coverage ratio and occupancy rate that needs to be met, and historical income numbers may need to show a history of stable income and expenses. These are only some of the many requirements that traditional lenders have for residential and commercial loans, and any deviation from these requirements may result in the loan application being declined.
Hard money lenders have greater flexibility to think outside the box when reviewing your loan request, they typically still require the deal to make sense in some way. For example, they will not simply lend on any property that is underperforming or in poor condition. There needs to be a clear turnaround and exit strategy in place. Hard money lenders may also have specific requirements regarding your personal financial situation, other aspects of your personal situation and the property itself.
Your Personal Finances
While a traditional residential lender may lend up to 95 percent or more of the sales price and a commercial lender may lend up to 80 percent of the sales price depending on the property type, a hard money loan typically has a much lower loan-to-value. You can reasonably expect to make at least a 30 to 40 percent down payment on the project regardless of the property type, and some lenders require even more money invested by you depending on the specifics of the loan request.
With this in mind, hard money lenders will analyze your financial situation to ensure that you have enough money available to make the down payment. In addition, hard money lenders generally have higher fees than a traditional lender. For example, you may pay a hard money lender 6-12% percent of the loan amount in some cases. Therefore, you also should have enough cash available to pay for this and other related fees. As is the case with many traditional lenders, a hard money lender may require you to have a specific cash reserve available after the closing as well.
Other Personal Factors
Hard money lenders review the entire loan request to determine its strengths and weaknesses. There are specific requirements regarding liquid cash, but there are not necessarily minimum credit score requirements or income requirements. Furthermore, a borrower may not need previous experience with real estate investments or with renovations. While these are not specific factors that a lender would deny a loan request for automatically, remember that the loan request does need to have strong points. For example, if the applicant’s income level is very low, he/she may need to show a huge cash reserve in various bank and investment accounts. It may also help if an applicant has a proven track record of success with other similar types of real estate projects. If multiple applicants are applying, the strength of one applicant can balance out the weaknesses of another one in some cases.
As you can see, there is considerable leeway for a hard money lender to examine the financial strengths and weaknesses of applicants provided they have enough cash reserves to cover the down payment and loan costs. Likewise, a hard money lender can get very creative when analyzing different property scenarios. The ability of the applicant to paint a positive picture of the property’s potential is important. In addition, the applicant needs to backup that positive picture with firm research and facts. For example, do not simply state that you plan to lease office space for $2 per square foot after a renovation. Instead, back up your statement by providing research showing actual market rental rates as well as market occupancy statistics. Remember that these should be for “like” properties. You cannot use market data for a Class A office building to support your projections for a Class C office building. Likewise, do not state that you can renovate a building for a specific amount of money. Instead, get a contractor’s written estimate for all of the work that needs to be done.
There are no hard and fast requirements for a hard money loan other than the down payment requirement. However, each lender is unique, and some lenders may have specific factors that they look for in each loan that they approve. Generally, hard money loan requests are reviewed on a case by case basis. If you can make a case that your loan request is exceptionally strong in some way with incredible upside potential, you may be able to find a hard money lender who will extend a loan to you.