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It’s not always easy to get approved for a traditional mortgage loan to purchase real estate. It’s especially challenging when you have a great investment opportunity and the lending process doesn’t go as planned. Fortunately, there’s a solution to this problem. Hard money loans are often used by real estate investors who need money fast. Let’s go over the ins and outs of hard money loans.
About Hard Money Loans
As an asset-based loan product, hard money loans are based on the value of your collateral (your property) instead of just your credit scores and income. It’s not that your financial standing isn’t an important consideration, it just isn’t the primary focus. With collateral involved, hard money lenders have a recourse should things go south. Hard money lenders consider each application instead of just following a rigid set of guidelines, which means you have a greater chance of getting approved.
There are different types of hard money loans that are used for various reasons. For instance, a bridge loan is for buying a property and then reselling or refinancing it. This type of loan can also be used to buy a property now, before you get the cash for a down payment from selling a property that you already own. A fix-and-flip loan is exactly as it sounds – you can buy, fix and flip a rehab property, then pay off the loan. Real estate developers can use a construction loan to start a new construction project, then either refinance or sell the property.
A type of loan that hard money lenders tend to avoid is the owner-occupied loan for consumers who want to finance a private property. The reason is because there are a lot of regulations for consumer loans that complicate the lending process. For instance, Dodd-Frank requires the lender to verify the borrower’s debt-to-income ratio. There are also certain licensing requirements for consumer loan products. If you’re looking for this type of loan, there are still some hard money lenders who provide them, so there’s hope.
How Hard Money Loans Work
Generally, the application process for hard money loans is easy and can take less than a week. Depending on the lender, there’s a chance that you could apply for a loan on Monday, and get funded on Friday. Borrowers are typically required to put cash down, and the amount is based on the Loan-To-Value (LTV) ratio or After-Repair-Value (ARV) ratio.
Hard money loans are for a short period of time, which is typically a few years, but often just 12 months. As opposed to making monthly payments toward the principal and interest, there’s a chance that you will only be required to make monthly interest-only payments. In fact, you could have zero payments until the loan matures, at which point you would make a balloon payment. The balloon payment will include the principal, all remaining interest and any fees.
How Hard Money Loans Are Different
Hard money loans have very little in common with traditional mortgage loans, except for providing money to purchase real estate. When it comes to hard money, the repayment period is short and sometimes there are a lot of fees. Interest rates can range from 5.4% APR through 15% APR. Many people who chose this option are unable to get financing elsewhere and have a poor credit scores. But there are others who simply need quick money for a real estate investment.
Hard money lenders will often approve loans when you have bad credit, a recent foreclosure and bankruptcies. The same can’t be said of traditional mortgage lenders. When you weigh the pros and cons, you might conclude that a hard money loan is a good alternative.
If you are a real estate investor who has your eye on a piece of property you know is a great buy, the last thing you want to see happen is have another investor swoop in and buy the property before you have the financing to do so. However, if you choose the route of traditional mortgages at a bank, that may very well happen. Thus, more and more investors, especially those who have had past problems with bad credit or bankruptcies, choose to focus instead on obtaining hard money loans. With a much simpler application process, quick turnaround times in obtaining funding, and flexibility in how the loans can be used for various projects, hard money loans are getting plenty of attention from today’s investors.
Basics of Hard Money Loans
Since hard money loans differ greatly from traditional mortgages, there are several things investors seeking these loans should know from the beginning. To start with, hard money loans can be used for various types of projects, including fix-and-flip properties, construction projects, and almost any other real estate investment project. However, they are rarely given out to those seeking financing for properties in which they will be living. But since hard money loans are obtained through individuals or private institutions, each investor’s situation is considered unique, so it is possible various types of arrangements can be worked out along the way.
Have a Plan in Place
If you decide to pursue a hard money loan, have a solid financial plan in place before getting the loan. To find a lender, start by asking other real estate investors in your area. Since it is likely other investors have turned to this source of funding, you should have little difficulty locating hard money loan lenders. Once you do, be sure you understand the terms associated with the loan. In most cases, this will include a much shorter payoff period that traditional mortgages, usually no more than three years. Along with this, the loans will carry higher interest rates and fees for underwriting, origination, and even for early payment of the loan balance. However, if you have a solid financial plan in place that will allow you to sell a property and pay off the loan in the specified payback period, these loans can be very useful.
Beware of a Buyer’s Market
For a hard money loan to be effective for an investor, it should be obtained when there is a seller’s market for local real estate. Otherwise, you may find yourself obtaining a hard money loan, purchasing a property, and then having the loan come due before the property has been sold. If this happens, your options will be to refinance the property or be foreclosed upon by the lender, neither of which will be good nor profitable.
Repaying the Loan
As stated earlier, hard money loans have much shorter payback periods than traditional mortgages, and also use balloon payments at the end to ensure all principal, interest, and fees are repaid. But along with this, it is important to remember that the lender will be looking at the value of the property to be purchased, since it will be the collateral for your loan. Therefore, you will need to not only be aware of how the loan will be paid off, but also have a certain amount of money upfront to make the purchase. With most hard money loans, expect the lender to provide a loan of 80-90% of the property’s Loan-to-Value Ratio. Thus, if you are planning to purchase a piece of investment property for $100,000, you will likely need as much as $20,000 of your own funding to go along with the hard money loan to make the purchase, so keep this in mind.
New Construction Loans
There are times when business owners need to expand to meet the needs of their growing business. There are business owners who want to own their own property as opposed to paying rent, and there are some who want to renovate a current building that they own.
While expanding may be necessary, it is an expensive project. Many commercial construction projects can take thousands to millions of dollars to complete. Many business owners are not able to pay for construction and renovation projects up-front, which is when a new commercial construction loan could be a useful tool that helps business owners achieve their goals.
What is a Commercial Construction Loan in Idaho?
A commercial construction loan is used to finance the cost of constructing a new building or renovating an existing commercial building. The funds from a commercial construction loan can be used to cover the cost of materials, labor, land, and other expenses.
How do Commercial Construction Loans Work?
A commercial construction loan isn’t the same as a commercial mortgage. Business owners who want to buy existing commercial properties can apply for a commercial mortgage. A commercial construction loan is tailored for business owners who want to construct a new building or renovate an existing commercial space.
Commercial construction loans in Idaho differ from other loans. With regular loans, the borrower is issued the full payment in one sum. When the borrower has received the funds, he or she is responsible for paying the balance of the loan. Most loans, such as a commercial mortgage, offer monthly payments that take place over the course of at least 10 years.
Business owners who take out a commercial construction loan will not be issued the full funds at once. Instead, partial amounts of the loan will be disbursed throughout the construction or renovation project. When you take out a commercial construction loan in Idaho, you will probably meet with a borrower to establish a draw schedule. A draw schedule determines when funds will be released by setting milestones. When each milestone in the draw schedule is completed, the borrower will be issued funds. For example, the first draw may be when the property is purchased, and the second draw may be when the land is cleared. Before the funds are disbursed, lenders may require that an inspector visit the construction or renovation site to ensure that the work has been completed. This schedule will continue until the project is finished.
With commercial construction loans, the borrower will only be responsible for paying interest on the amount that has been released. For instance, if a borrower took out a commercial loan for $400,000, but he or she has only been issued $200,000 of the total loan amount, then he or she will make interest-only payments on $200,000.
After the project has been completed, and the entire loan amount has been disbursed, the borrower can pay the remaining balance in one large payment. This payment covers the remaining principle, interest, and other fees. However, borrowers who do not want to pay the full amount at once can apply for a commercial mortgage. A commercial mortgage uses the construction/renovation property as collateral. It allows a borrower to pay off the commercial construction loan with the funds from the commercial mortgage though fixed monthly payments over an extended period.
If you want to learn more about new commercial construction loans in Idaho, contact our team at Delancey Street. Our experts are ready to provide you with further details about new commercial construction loans.[flexy_breadcrumb]