What Is Hard Money Lending

(and other common hard money questions)

Answers to the most popular hard money lending questions from our customers and from around the internet…

What Is a Hard Money Lender? 

A hard money loan is a way to secure financing that does not rely on convection banks and mortgage lenders. 

The lenders in a hard money loan are private individuals & funds. Brokers play a key role in connecting these parties with the borrowers. 

A hard money lender like Jacksonville Hard Money Lenders can lend money much faster than a traditional bank institution can and we pay a much greater emphasis on the deal and the real estate you’re borrowing the money for, than a person’s credit history or or income.

Do Hard Money Lenders Require Appraisals?

In short, YES. During the loan application process an appraisal will be performed to estimate an ARV, or after repair value of the asset. If our estimate is inline with your projections, you are on your way to getting approved for a hard money loan. 

When borrowers need financing extremely fast, we may have a broker who is an expert in the specific asset class provide an ARV estimate, and we will determine the loan to value based on this action.

What Credit Score Is Required For a Hard Money Loan?

One of the benefits of hard money loans over traditional bank financing is that hard money can be lent to people with very bad credit history and low credits scores. This is because a consideration in whether to issue a loan is based on whether there is adequate equity in the property the loan is being taken out against.

For people with poor credit, hard money loans can enable them to make investments you otherwise would not have been able to make.

How Can I Get A Hard Money Loan For a Flip? 

Because properties that are going to be flipped are typically distressed or in need of significant rehab work, it’s not normally possible to secure financing from traditional financial institutions for these types of projects. 

Hard Money Loans can be a fantastic option for investors and developers needing money for Fix & Flips. 

Our lending decision is heavily influenced by the amount of equity in the property, calculated by estimating the after repair value. We will lend as high as 90% of loan-to-cost, or alternatively 75% of loan to After Repair value.

Are Hard Money Loans Interest Only? 

Typically no.

Hard Money loans will include an interest payment, sometimes as well as some principal and at the end of the lending term a balloon payment is due.  

Hard Money lenders also charge loan origination ‘points’ – these cover administrative and other hard costs associated with issuing the loan. 1 point is equal to 1% of the loan value. Normally loan origination costs vary between 1% to 3%.

Are Hard Money Loans A Good Concept?

Hard Money Loans are sometimes the very best option for borrowers.But not for every borrower, and not for every situation. 

Our team is focused on working with you to provide you with the information you need to make an informed decision.

 

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Are Hard Money Lenders Safe?

Hard money lending is as safe and transparent as any financing option. Unfairly, hard money haS earned a reputation of being unsafe for borrowers. The reality is very much a different story.  

While it seems simple – an asset secures the loan so all parties to the loan deal are safe. The lender will take control of the asset if the borrower defaults, and the borrower gets financing fast that can be paid back on terms and on a timeline that works for them.

Having said this, the borrower often has the option to negotiate very favorable repayment terms that will work for them and their project.

Is a Hard Money Loan The Same as Cash?

Within the finance and real estate industries, oftentimes hard money is considered ‘cash’ but not because it is actually cash, but the speed in which the money can be transferred from buyer to seller is equivalent to cash and therefore hard money and cash offers are on an equal footing. 

This puts investors and developers in very strong positions to potentially win deals without any of their own money, assuming there is sufficient equity in the property.

How Much Do You Have To Put Down On a Hard Money Loan?

Not all hard money lenders require a deposit, but some do. We do issue loans where no down payment needs to be made.

What is more normal though is that our borrowers put down between 20 to 30 percent of the purchase price.

Do Hard Money Lenders Report to Credit Bureaus?

Despite the fact that it’s extremely rare that a loan from a hard money lender will appear on a credit report, it will often appear on an Asset Search and Background Check, which most lenders, from hard money lenders to banks, do indeed perform on all applicants.

So even though the hurdles  to securing financing are typically much simpler when it comes to hard money, the lender still needs to perform some of our own due diligence. It is in no one’s interest to lend money to people who do not have the capacity to pay it back.

Are Hard Money Loans Non-Recourse?

Despite popular belief, non-recourse loans are offered by hard money lenders, not just traditional financial institutions. We  offer all of  our loan applicants the option to choose between recourse and non-recourse hard money loans. Our team will take the  time to explain the terms of each and the pros and cons in the context of your personal situation and investment goals. 

For those who are not sure, a non-recourse loan, also called non-recourse debt is a loan that is secured by the property itself. So if a borrower fails to repay a loan, a non-recourse loan means the borrower can not seize any assets other than the property, even if the property drops in value, lower than the amount of the loan.

What’s the 70% Rule In House Flipping?

When investors are seeking to figure out the maximum price they will think about paying for a property, the 70%

Rule of real estate investing dictates that you ought to pay no greater than 70% of the after repair value (ARV), minus repair expenses.

This is a guide naturally and everyone’s risk tolerance and the experience is different, so too are all real estate investment opportunities.

This is a rule-of-thumb guide real estate investors use when figuring out how much they might be prepared to pay for a piece of land or a building. The 70% rule says that an investor should not pay more than 70% of the ARV, deducting repair costs. As a lender we also like to see this much equity in the property.

This is a guide of course and everyone’s risk tolerance and experience is different, so too are all real estate investment opportunities.

How is Hard Money Different From a Bridge Loan?

The terms “Bridge Loans” and “Hard Money Loans” are often used interchangeably to refer to the same thing. And in many ways they are the same thing. Both loans are short term loans that are secured against the future value of the property and repayment terms can be much more flexible than traditional bank financing. One common way of differentiating between the two is that Hard Money is loaned by private lenders and Bridge Loans are issued by financial institutions.

Who Uses Hard Money?

There are several users of hard money, but the most common users of hard money loans are real estate developers and real estate investors. Generally they use hard money for one of two short-term specific reasons: 

The first is to finance fix & flip offers where the objective is to very quickly get your money back and pay back the loan in a short time period, generally within 12 months, however not more than 3 years. The speed at which the money can be made available is a key reason flippers typically use hard money. 

The second use case is to secure hard money to bridge the gap between when an investment property is purchased through to the point at which longer-term financing from a bank can be secured. There are many reasons why banks won’t loan in these scenarios, which we cover on this page.

DO I QUALIFY FOR A HARD MONEY LOAN?

A key benefit of hard money lenders is that many people who do not qualify for bank financing will qualify for a hard money loan.

The critical determining factor for getting a hard money loan is having the required deposit for the downpayment or having equity in the property to function as collateral for the loan. As a rule of thumb, the minimum downpayment or equity needed ranges 25-30% for residential properties and 30-40% for commercial properties such as apartment buildings and warehouses.

To be clear, a down payment is not always needed to get a hard money loan, often adequate equity in the property will suffice. But loans that lend 100% of the value of the property are rare, because most hard  money lenders deem it to be very important that you as the investor or borrower have ‘skin in the game’. What this means is that you are financially bought into this deal as well, and you will be incentivized to act in the best interest of all lending parties because you stand to lose your own money if you do not deliver against your commitments. 

That said these are ranges and our lending advisors will evaluate your specific situation and make a highly individualized judgment. We are in the business of making loans to people who we think are in a position to repay the loan.

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