Residential Hard Money Loans 101

Whether you’ve been through a foreclosure in the recent past or want to buy an unconventional property to turn into a dream home, finding financing can be a real struggle. Even qualified borrowers can find it difficult to secure the loans that they need in order to buy residential properties in today’s market. For investors and borrowers who don’t meet conventional lending requirements, finding financing might even seem impossible. Thankfully, hard money loans are a viable option for residential buyers with unique needs.

Hard money loans, also known as equity-based or private financing, have long been used by real estate investors who want to purchase properties traditional lending institutions won’t finance. However, these types loans can also be used by residential buyers who want to purchase homes or investment properties. These types of loans offer terms that scare some new investors, but it’s important to remember that buying property is a great way to build personal wealth.

Why Use Residential Hard Money Loans?

Residential private money loans can be used in a wide variety of buying situations. Some believe that these types of loans are only for those with poor credit, but that simply isn’t true. While private financing can be a good option for buyers with damaged credit histories, they are also used when:

• Homes don’t meet the requirements of FHA lenders.
• Buyers want to turn non-conventional properties into homes.
• Traditional lenders are unable or unwilling to finance fix and flip loans.
• Buyers have a mortgage on another residence.
• Buyers need to finance purchases quickly.

Who Uses Residential Hard Money Loans?

Because they offer such flexibility, hard money loans are utilized by many different types of borrowers. Many investors who opt for these types of loans do so because they find properties that they want to buy and don’t have time to wait for approvals through traditional financing institutions. Other investors opt for private financing because they want to buy properties that must be rehabbed or are viewed as high risk by lenders due to their location or use history. Individuals who have been through foreclosure or bankruptcy may also be able to use these types of loans to purchase residential property.

Buyers who are considering using a private lender enjoy options that traditional lending institutions don’t offer. Whether you want to buy a distressed property or want to get back on track after a foreclosure, a private financing might be a good choice. With careful, advanced planning, private financing can provide for an excellent return on investment.

Hard Money Loans – The Basics

What is hard money used for?

A: Hard money is generally used as a bridge to allow the borrower or property to be brought into compliance with conventional financing guidelines or sold. It is generally a short to medium term solution (1-5 years) and it is used for all types of real estate: commercial, retail, office, industrial, raw land, construction, land development, multi-family, single family homes and manufactured homes.

Q: Why would anyone borrow hard money when banks charge lower interest and less fees?

A: There are many reasons why a borrower would choose to use private or hard money over less expensive institutional financing, but the following will address the most common uses. Speed of funding is the most common reason — banks typically take a minimum of 45 days to fund a residential loan, 60-90 days to fund a commercial loan, and 120 or more days to fund a construction or development loan. Private money, however, is typically funded within two weeks, and can be funded as quickly as 24 hours in certain cases. Another type of project suitable for private money is a property that either lacks cash flow to meet bank requirements or requires physical improvements. Banks will not typically fund a loan secured by a property that requires rehabilitation prior to its use, and thus the borrower will obtain a private money loan to purchase and rehab the property, and then payoff the private money loan with conventional financing. Sometimes a borrower will purchase a commercial property that has no tenants. Banks will not loan on such properties but private money will provide a bridge loan to purchase the property and provide the borrower with time to lease up the property. Once the leases are in place and have been “seasoned” for at least 12 months, a commercial lender will refinance the private money loan with institutional financing. Banks are also prohibited by law from making most types of raw land loans, so private money is practically the exclusive source of financing for raw land. Equity in the subject property or other properties owned by the borrower is another factor. For example, Coppercrest Funding loans based on the value of the property and not the purchase price, and is also able to cross-collateralize the loan with other properties, so we sometimes lend 100% of the purchase price.

Q: What are the interest rates?

A: Private money rates generally range from 12 to 14%. The rate is determined by looking at a combination of factors: (a) LTV ratio, (b) strength of borrower, (c) condition/desirability of property, (d) actual cash-in or real equity contributed by borrower.

Q: What fees are involved?

A: Hard Money Lenders charge a loan fee generally equal to 3 to 5% of the gross amount of the loan. There is also charge typical lender fees, such as a document preparation fee, a loan processing fee and an application/inspection fee. There are also third party fees involved, including escrow fees, title insurance fees and account servicing fees. CopperCrest Funding doesn’t not charge hidden junk fees, but some lenders do, so make sure you read the paperwork or have an attorney take a look at it for you.

Q: Can the fees be paid from the proceeds of the loan?

A: Yes, so long as there is enough equity in the project. Most often, all fees other than the application fee are paid from the loan proceeds.

Q: Is there a pre-payment penalty?

A: Generally hard money loans have a 3-6 month minimum interest requirement. For example, with a 6 month minimum interest clause, if the borrower repays the loan in 4 months, there is a penalty of two months interest. If the borrower repays the loan after six months, then there is no pre-payment penalty.

Q: How quickly can a private money loan close?

A: CopperCrest Funding have closed loans the same day when presented with a complete loan package, but we typically take one to two weeks. Since hard money is coming from private sources, and every deal is unique it is important to ask about closing timelines on a case by case basis, and each lender is different.

Q: Is an appraisal required?

A: Typically hard money loans require an appraisal, but if there is not enough time to obtain an appraisal and there are good comparable sales information then the lender can waive the appraisal requirement.

Q: Why do they call it “hard money”?

A: We have heard many explanations, but the most common answer is that the lending is based on “hard” assets as opposed to the borrower’s credit or income.

Hopefully this article answered some of your questions about hard money. If you are in a unique situation whether you have a great one of a kind investment opportunity or are facing a foreclosure because of an unexpected happening, hard money may be the solution for you. Remember, just like with any loan or mortgage, ask a lot of questions and read the paperwork.