When traditional lenders like banks and credit unions cannot provide the funding you need for a real estate investment, hard money loans may be an option worth exploring. Hard money loans are short-term, asset-based loans that, at high-interest rates, are secured by the property rather than the borrower's creditworthiness. This article will explore how hard money loans work for real estate investors and what you need to know about hard money lending before considering one.
How Do Hard Money Loans Work?
Private investors or companies specializing in commercial property or lending to real estate investors typically provide hard money loans. These private lenders evaluate loan applications based on the value of the property used as collateral for traditional loans rather than the borrower's credit score or income.
The loan amount from a hard money lender is usually based on the average interest rate and a percentage of the property's value, known as the loan-to-value (LTV) ratio. The hardest money lenders offer LTV ratios ranging from 50% to 70%, although some may go as high as 90%. The LTV ratio determines how much cash you can receive from a hard money loan.
Typical Hard Money Loan Terms
Hard money loans have shorter terms compared to traditional mortgages. The typical term for a hard money loan is six months to three years, although some lenders may offer hard money lenders that require longer repayment terms, up to five years. Many hard money lenders' interest rates are higher than traditional mortgages and can range from 8% to 15%.
How To Pay Back Hard Money Loans
Most hard money loans require monthly interest-only payments during the standard loan term, with a more significant down payment and a balloon payment due at the end of the conventional loan term. A balloon payment is a large lump sum payment that covers the remaining principal balance of the loan.
To repay the total interest paid on your hard money loan, you can sell your property or refinance it with a traditional mortgage before the balloon payment is due.
Can You Use a Hard Money Loan For a Down Payment?
Approval Process: Hard money lenders typically require borrowers to pay a large do payment sent on investment property purchases. This down payment can range from 20% to 30% of the purchase price and must be paid upfront by the bank loan to the borrower.
Long-Term Hard Money Loans
While most hard money loans have short terms, some lenders offer long-term options known as bridge or loan programs or term loans. Bridge loans are designed for borrowers who need more time to complete renovations or repairs," rehab costs " and " house flippers " before refinancing with a traditional mortgage lender.
Bridge loans typically have terms ranging from a short period of six months to three years and interest rates ranging from 8% to 12%. These types of loans can be helpful for investors who want to hold onto their investment properties for the long or short-term loan but need financing to get started.
Hard Money Loan Fees
In addition to the high interest rates, hard money lenders charge origination, underwriting, closing, and appraisal fees. These fees vary depending on the lender but can add up quickly and increase your interest rate and overall borrowing cost.
Hard money lenders may charge the following fees:
Origination fee: This fee is charged for processing your loan application and can range from 1% to 5% of the loan amount.
Underwriting fee: This fee covers evaluating your loan application, including verifying your income, credit score, and property value.
The appraisal fee covers having an appraiser evaluate the property you use as collateral.
Title search and insurance fees cover verifying property ownership and insuring against title defects or liens.
Prepayment penalty: Some hard money lenders may charge a penalty if you pay off your loan before the end of its term.
Late payment fee: If you miss a payment on your hard money loan, you may be charged a late fee.
It's important to carefully review all fees associated with monthly payments and your hard money loan before signing any private money loan agreements or contracts.
Explain the appraisal fees
The appraisal fee is a cost associated with hard money loans that cover having an appraiser evaluate the property used as collateral for the private loan. The appraisal aims to determine the property's current market value under the secured loan and ensure that the borrower's credit rating is worth enough to cover the loan amount in case of default.
The appraiser will typically visit the property, take measurements, note any improvements or renovations, and compare it to similar recently sold properties. Based on this information, they will go after repair value and provide a report detailing their property value estimate for the rental property.
The appraisal fee can vary depending on the location, property type, good credit, and size of traditional loans. It's important to note that while the borrower pays for this fee upfront, it benefits them by ensuring that they're not overpaying for a property and borrowing an appropriate amount based on its actual value.
Find Hard Money Lenders Near You
One way to find most hard money lenders is to search online for "hard money lenders [your city/area]" or use a search engine to find local listings and websites of hard money lenders. You can also reach out to a real estate agent, mortgage broker, or attorney who may be able to refer you to a few days the reputable hard money lenders in your area.
Research and due diligence are essential when considering a hard money lender. Look for reviews and testimonials about the traditional lender from previous clients, check their licensing and accreditation, and compare rates and terms from multiple hard money lenders require there before deciding.
Conclusion
Hard money loans can be an attractive option for real estate investors who need quick access to cash without relying on traditional lenders like banks or credit unions. However, they come with higher interest rates and shorter terms than personal loans or traditional mortgages.
Special Note:
You must get a hard money loan; it's essential to understand co, conventional mortgages, how they work, and what you'll need to qualify. Be sure to carefully review all terms and conditions associated with conventional loans and your hard money loan rates before making any borrowing decisions.