Who Uses Hard Money Loans and Why?
Are you looking to secure a hard money loan in 2021, but you aren’t sure whether it’s the right option for you? We’ve rounded up some facts that you should know about hard money loans. You’ll also learn about the pros and cons of hard money loans and whether you should consider them.
How Hard Money Loans Work
Hard money loans are quick loans offered by private lenders. These loans use real estate property as collateral and do not focus on credit/income history. Hard money loan requirements are often limited to property used to secure the loan. In other words, anyone with a real estate property can qualify for a hard money loan.
Most hard money lenders accept single and multi-family residential and even commercial properties. But some specialize in specific properties and only accept those in certain localities. These lenders also tend to avoid owner-occupied residential properties. This is due to the current consumer protection law. Additionally, most hard money lenders do loans in a first-lien position to minimize risks.
How Should You Use Hard Money Loans
Hard money loans come with high-interest rates, unlike conventional financing through a bank. This makes them ideal for specific deals. For instance, bank financing is advisable when buying a primary residence and you have a good credit history. The only challenge is that you’ll have to go through a lengthy approval process.
That said, the typical use cases of hard money loans include:
- Fix and flip deals. This is common among many real estate investors.
- Land loans – this is where you secure a loan to purchase a plot of land.
- Construction loans – you use the loan for construction or renovation purposes.
- If you want to buy a property but have credit issues.
- If you need quick financing to secure a property on quick a sale.
Is it Right for You?
Whether a hard money loan is good for you or not depends on your unique financial situation. For most people, it’s the only alternative when a bank loan isn’t an option. The fast processing rates are another advantage that draws many people to hard money loans.
For instance, if you are to acquire a property with many competing bids, hard money will be helpful. The bank will take weeks, if not months. Plus, they will try to check your income history. They will also want to know if you have a healthy income. If these requirements sound tough, then hard money loan lenders are your best bet.
Hard Money Loans Interest rates and Loan to Value Ratios (LTV)
When you compare hard money to conventional loans, the latter has lower interest rates. The typical hard money loan rates in 2021 are in the range of 12 – 18%. Lower interest rates are common in regions where there are many private lenders. That means there’s high competition hence reduced demand. Another way to look at this is that the lower the risk to the lender, the lower the rates.
Apart from rates, the other factor to consider is the loan to value ratio or LTV. The latter represents the ratio of the loan amount divided by the value of the property. Most hard money lenders lend up to 65% to 75% of the current property value.
Similarly, a typical lender will base the LTV on the current property value. But some lend based on the after repair value (ARV). That means the loan is calculated based on the estimated value after renovation. This makes the loan riskier for the lender and will raise the interest rates. Such lenders have rates in the range of 16-18% plus 5-6 points if the borrower makes little to no down payment.
Finding the Right Lender
Now that you know how hard money loans work, next is to find the right lender in the market. If you are a real estate investor, chances are, you already know a private money lender. You just have to do your research to ensure the lender has the best services.
For beginners, finding the right lender means doing thorough and deeper research. You can choose to ask around peers. Or join a local real estate or investment group. Here you will consult your close networks and ask for their genuine advice.
Even then, you shouldn’t just accept any lender recommended. Here are some things to consider:
- Reputation – does the lender has a proven track record in the industry? You don’t want to work with a lender who loans-to-own. They must show they are competent and honest in how they treat clients.
- Experience – some lenders are specialized in specific niches. This makes them more knowledgeable in those fields. Such lenders often have lower rates since they have found a strategy that favors them.
- Rates – Higher interest rates mean you’ll pay more in the long run. A rule of thumb is to compare the rates and repayment periods.
Once you’ve paid attention to all the above, you are good to go. What follows is to identify the property you want to buy and approach your private lender. The paperwork should be pretty straightforward, with loans processed within days.