What is a hard money lender?

A hard money lender is a lender who makes loans secured by real estate, typically charging higher rates than banks but also making loans that banks would not make, funding more quickly than banks and requiring less documentation than banks. Hard money lenders are sometimes called “asset-based lenders” because they focus mostly on the collateral for the loan.  .

When does it make economic sense for a borrower to use a hard money loan?

Unlike traditional banks, hard money lenders are able to quick respond and quick fund deals. The most important factor for a hard money lender is the value of the property being financed.

How is a hard money lender different from a private investor?

Hard money lenders referred to as private money lenders; bridge loan lenders; transitional lenders; or asset based lenders.

What are advantages of working with hard money lenders? 

  • A simpler application process and quicker approval/disapproval decision.
  • Less documentation on the borrower’s personal financial situation, including income and tax returns.
  • Most hard money lenders will not require a perfect credit score. While it will be nearly impossible to get a traditional mortgage with less than 660 Fico score, some hard money lenders lend to borrowers with a score of 600 and above.

What are some disadvantages of hard money lenders? 

Hard money loans are more expensive than bank loans, with higher interest rates and origination fees. Hard money lenders charge more than traditional banks because there is a higher default risk. The hard money lending industry is not highly regulated. The quality of hard money lenders varies substantially from one lender to another. We advise borrowers to never pay any application fees for simple Fix & Flip loans.

What kinds of property do hard money lenders lend on? 

Hard money lenders will lend on both commercial and residential properties. Hard money lenders will usually not lend on owner-occupied residences. Commercial properties can include industrial, shopping centers, hotels and office buildings. Some hard money lenders will also invest in raw land intended for development.

Why does the lender need title insurance?

Title insurance helps protect someone who has purchased real estate against another party making a claim challenging the ownership of the property and the seller’s right to enter into a transaction.

How much do hard money lenders charge?

Hard money lenders typically will charge interest rates in the high single digits to low double digits, with a range of 5 percent to 12 percent being considered standard. Additionally, origination fees can range from 1to 3 points.

Is a hard money loan personally guaranteed?

Some lenders may require that a hard money loan be personally guaranteed by the borrower, although there are instances where lenders are willing to offer no-recourse loans based on the borrower’s history and the appeal of the specific opportunity.

What happens if a borrower doesn’t pay the hard money lenders back?

A borrower who defaults on a hard money loan ultimately is subject to having the lender foreclose on the property which has been put up for collateral. It should be noted that lenders typically follow a sequence of steps in order to try to avoid this final recourse. Such steps may include the lender attempting to reach the borrower to find out the current status and disposition of the property in order to see if things can be worked out cordially; the penultimate step is to file a Notice of Default if necessary to trigger the legal foreclosure process.

What information do hard money lenders require?

Hard money lenders have different requirements for the due diligence process, but generally speaking, origination of commercial loans will require the most comprehensive list.

Residential loans may require an appraisal from an outside party. If the lender is local then a in-person inspection of the property is nearly always part of the decision-making process.

How long does it take hard money lenders to fund a loan?

It generally will take a hard money lender 30 days or less to fund a loan, although some are equipped to do this in two weeks or less.

How do hard money lenders decide how much to lend?

Hard money lenders make lending decisions based on either a Loan-to-Cost (LTC) ratio or Loan-to-Value (LTV) ratio. These ratios measure the risk of the loan by comparing the loan amount to the cost and value of the underlying real estate, respectively.

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