Over the last few weeks due to the Coronavirus pandemic and global economic slowdown, banks have started to tighten up lines of credit to real estate investors in the US. When liquidity starts to dry up in a market, real estate investors will often find alternative sources of funding through Private Lenders. These private lenders offer what is called a hard money loan to investors in exchange for quick access to capital with little to no underwriting performed.
A hard money loan is a short-term asset-based loan secured by real property. Hard money loans are underwritten and funded by private investors, family offices, REIT’s, and institutions looking for higher yields as opposed to conventional government-backed lenders such as banks. The terms are usually around 12 to 36 months with a case-by-case basis for up to 30 years. The typical structure involves monthly payments of only interest with a balloon payment at the end of the term.
The loan amount offered by the hard money lender is dependent on the loan to value ratio. Hard money loans are used by real estate investors who need to close quickly in order to secure a property or who need to refinance but do not have full income documentation that conventional banks require.
Hard money lenders are focused on what the property’s value is versus what the borrower’s credit or income is. When borrowers cannot obtain bank financing due to a Lis pendens, foreclosure, short sale, bankruptcy, or other negative credit events then a hard money loan is a great solution on investment properties if they have sufficient equity in the property being purchased or refinanced.
What types of Properties are Hard Money Loans used for?
A borrower can get a hard money loan on almost any type of property including but not limited to single-family residential (SFR), multi-family, mixed-use, residential developments, commercial, office, retail, warehouses, industrial, and even vacant land. In fact, many hard money lenders have expanded into multiple asset classes involving multiple states particularly Florida, Texas, Georgia, New York, New Jersey, Tennessee, Massachusetts, and Washington D.C.
Many hard money lenders will not lend on owner-occupied residential properties due to consumer protection guidelines from Dodd-Frank, RESPA, and TILA so as a borrower you will need to show that the property is for “business or investment purpose or use” and not to live in as a primary residence. To do this a borrower will need to provide a copy of his driver’s license, utility bill, or bank statement showing their primary address in which they reside.
What are the typical Interest Rates and Points for Hard Money Loans?
The interest rates and points charged by hard money lenders will vary from lender to lender, but they typically range from 1.50% – 5.00% with rates from 7.50% to 12.00%. For example, hard money lenders in coastal states such as Florida, Texas, and California generally have lower rates than other parts of the country since there is stronger competition in those states. The reason the rates are higher on hard money loans is that hard money lenders take on more risk since they are not underwriting the borrower’s income and ability to repay the loan. Due to this higher risk, the reward must be higher for the lender or investor making the loan.
Conclusion on Hard Money Loans
Hard Money Loans are a great tool for any investor looking to fund a future real estate transaction quickly without all the hassle of trying to obtain bank financing particularly in times when access to credit lines is drying up. The higher rate may appear daunting at first to a novice investor, but experienced investors know the value of being able to secure properties from Sellers at much lower prices when offering “cash” with a hard money investor backing the project. The initial costs are far outweighed by the return on investment when the project is completed. When looking for a hard money lender to partner with consider Capital Funding Financial which is a nationwide direct lender with aggressive rates, great service, and tons of experience helping real estate investors with their rental properties, fix and flips, and commercial transactions.