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Benefits of Partnering with a Hard Money Lender

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Don’t let conventional loans become your default choice when it comes to funding your next real estate investment property. A hard money loan can be the perfect solution for diversifying and expanding your existing portfolio. This type of loan is a form of short-term financing that is typically used by real estate investors to purchase properties quickly or to finance renovations. Unlike traditional loans from banks or credit unions, hard money loans are funded by private investors or companies and are secured by the value of the property being purchased.

Characteristics of Hard Money Loans

Asset-Based Lending: The primary factor in hard money lending is the value of the collateral. Lenders focus on the property’s current market value or its after-repair value (ARV) rather than the borrower’s credit score or financial history.

Short-Term Financing: These short-term loans range from a few months to a few years. They are designed for quick turnaround projects, such as house flipping, bridge loans, or property rehabs.

Faster Approval and Funding: One of the major advantages of hard money loans is the speed of the approval process. Traditional loans can take weeks or even months to get approved, while hard money loans can be approved and funded in a matter of days. This quick turnaround is crucial for investors who need to act fast to secure a property.

Flexible Terms: Private money lenders can offer more flexible terms compared to traditional lenders. They are often willing to tailor loan structures to meet the specific needs of the borrower and the project, making them an attractive option for non-standard or complex transactions.

What is a Hard Money Lender?

a loan contract - hard money lender

This common real estate term is not as intimidating as it sounds and is actually one of the most useful and accessible tools for real estate investors to gain an advantage in what can sometimes be a competitive market. Hard money lenders are organizations that fulfill a legitimate and essential niche in the real estate market, providing fast, asset-based loans. What’s more, they provide funding for sprawling real estate investments and regular homes alike. Private lenders are distinguishable from traditional banks in that they use their own funds to finance real estate deals as opposed to using money from depositors.

Why Use A Hard Money Lender?

Now that you understand what hard money lenders are, your next question may be why you should use one. The short answer is time. In the real estate world, time is literally money. From an investor’s perspective, the faster you can finance and close a deal, the faster you can turn to the next project on your itinerary the more deals you complete, the healthier your bottom line is when it’s all said and done. Because hard money lenders do not conduct extensive background checks on applicants, loans can be approved in a matter of days as opposed to weeks. This makes them particularly useful for investors targeting time-sensitive deals. On the opposite end of the spectrum, normal banks can take as long as 30 days to approve your loan. Given the dynamic nature of the current real estate market, this can be an unacceptable delay.

Whereas traditional loans are premised on the creditworthiness of the borrower, hard money loans are asset-based, meaning the underwriter evaluates the viability of the real estate project and its inherent worth or potential to produce a reliable revenue stream. This unique form of underwriting gives hard money lenders increased flexibility when it comes to the specific terms and conditions of the loan itself. Even hard money loan payments can be renegotiated in certain situations. With traditional financing, it is often challenging to obtain a new loan for another property you are interested in while you have an outstanding mortgage. Smart investors will use hard money loans to fund the acquisition of several properties in a compressed time window.

What Can I Use A Hard Money Loan For?

a contract in front of a small house - hard money lender

Some common uses for hard money loans include:

1. Property Acquisition

  • Distressed Properties: Hard money loans are ideal for purchasing properties in poor condition that need significant repairs or renovations. Traditional lenders often avoid these properties due to their condition.
  • Foreclosures and Auctions: Investors can use hard money loans to quickly acquire properties at auctions or foreclosure sales, where the ability to close rapidly is crucial.

2. Fix-and-Flip Projects

  • Renovation and Resale: Investors who buy properties, renovate them, and then sell them for a profit (house flippers) frequently use hard money loans. These loans provide the upfront capital needed for both the purchase and the renovation costs.
  • Short-Term Holds: Properties intended for quick resale after improvements benefit from the short-term nature of hard money loans.

3. Bridge Financing

  • Interim Financing: Hard money loans can serve as bridge loans, providing temporary financing until a more permanent loan is secured. This is useful for buyers who need to purchase a new property before selling their existing one.
  • Cash Flow Management: Investors can use hard money loans to maintain cash flow while transitioning between projects or waiting for long-term financing to be approved.

4. Commercial Real Estate

  • Development and Construction: Developers can use hard money loans to finance the construction of new commercial properties or the significant renovation of existing ones.
  • Investment Properties: Investors looking to acquire and improve commercial properties, such as office buildings, retail spaces, or multi-family units, often turn to hard money loans for fast funding.

5. Land Acquisition and Development

  • Raw Land Purchase: Hard money loans can be used to purchase raw land for future development.
  • Pre-Construction Costs: Developers can finance the early stages of a project, such as obtaining permits and preparing the land, before securing construction financing.

Applying for a Hard Money Loan

a pen pointing at a contract - hard money lender

The application process for a hard money loan is also much less of a hassle. With conventional financing, the lender is required to verify your income and select the amount based on your target property’s appraised value. Those are only the initial steps of a drawn-out process that can be both time-consuming and overly-selective. Often a small error with the application materials can lead to a substantial delay. Conversely, with a private money lender, investors can obtain more flexible financing terms at different incomes and do not need to have a stellar credit history. Generally, the application process goes something like this:

1. Preparation Phase

Evaluate the Property: The foundation of a hard money loan application is the property itself. Borrowers need to have a clear understanding of the property’s current market value and its potential after-repair value (ARV) if renovations are planned. This evaluation can involve obtaining an appraisal or conducting a comparative market analysis. Using our deal calculators, you can get a quick estimate of your loan requirements for your rental property or fix-and-flip project. 

Gather Documentation: While hard money loans are less documentation-intensive than traditional loans, certain key documents are still required. These typically include:

  • Property purchase agreement
  • Property appraisal or comparative market analysis
  • Renovation plans and budget (if applicable)
  • Proof of down payment funds
  • Personal identification and any past experience with similar projects

Identify Potential Lenders: Research and shortlist hard money lenders who have a good reputation and specialize in the type of project you are undertaking. Check their interest rates, loan terms, fees, and reviews.

2. Initial Inquiry

Contact Lenders: Reach out to the selected lenders to express interest in a hard money loan. This can often be done through an online inquiry form, email, or a phone call. 

Provide Basic Project Details: Share preliminary details about the property, including its location, current condition, purchase price, and intended use of the loan (purchase, renovation, development, etc.). This helps the lender quickly determine if the project aligns with their lending criteria.

3. Application Submission

Complete the Application Form: Fill out the lender’s specific application form. This form will ask for personal information, details about the property, and a summary of the intended project.

Submit Property Documentation: Provide the necessary documents, such as the property purchase agreement, appraisal report, and any renovation plans. These documents are crucial for the lender to assess the property’s value and the feasibility of the project.

4. Evaluation and Underwriting

Property Inspection and Appraisal: The lender will typically conduct their own inspection or appraisal of the property to validate its current market value and the projected ARV. This step is critical for the lender to determine the loan amount they are willing to offer.

Borrower Interview: In some cases, the lender might conduct a brief interview to understand the borrower’s experience in real estate investment and their plans for the project. This step is more common for large or complex loans.

5. Loan Proposal and Terms

Loan Terms Proposal: If the lender is satisfied with the property and the project, they will issue a loan terms proposal. This proposal outlines the loan amount, interest rate, repayment schedule, fees, and other terms.

Review and Negotiation: Borrowers should carefully review the proposed terms. It’s possible to negotiate aspects of the loan to better fit the borrower’s needs. Understanding all associated costs, including interest rates, origination fees, and potential penalties, is crucial.

6. Approval and Closing

Loan Commitment Letter: Once terms are agreed upon, the lender will issue a loan commitment letter, signifying their intent to fund the loan, contingent upon final due diligence.

Due Diligence and Documentation: The lender completes any remaining due diligence, such as verifying property title and checking for liens. Borrowers will then sign various loan documents, including the promissory note and deed of trust or mortgage.

Funding: After all documents are signed and due diligence is completed, the lender disburses the funds. This is typically done through an escrow account to ensure the funds are used appropriately for the project.

In conclusion, partnering with a hard money lender like Express Capital Financing can be a game-changer for real estate investors. The seamless process, quick access to funds, and tailored financing options provide a competitive edge in today’s dynamic market. By leveraging the benefits of working with a reputable hard money lender, investors can streamline their projects, seize opportunities, and achieve their financial goals with confidence. 

If you’re ready to experience the advantages of partnering with a leading hard money lender get in touch with us today.

FAQ

To qualify for a hard money loan, the primary criterion is the value of the property being used as collateral rather than the borrower’s creditworthiness or income. Potential borrowers need to demonstrate that the property has sufficient value to secure the loan, often through an appraisal or market analysis. Additionally, having a clear and feasible exit strategy, such as selling the property after renovations or refinancing with a traditional lender, is crucial. While a positive credit check and a solid track record in real estate investment can enhance approval chances, they are not typically mandatory. Instead, lenders focus on the property’s equity and the borrower’s ability to execute the proposed project successfully.

Yes, there are several risks associated with hard money loans. The primary risk is the high cost, as these loans typically come with significantly higher interest rates and fees compared to traditional mortgages, which can quickly add up and affect overall profitability. Additionally, the short-term nature of hard money loans means borrowers must have a clear and effective exit strategy to repay the loan promptly, such as selling the property or refinancing. Failure to repay can result in the lender foreclosing on the property, leading to the loss of the investment. Furthermore, market fluctuations or unexpected issues during renovation or development can impact the property's value and the borrower’s ability to repay, increasing the financial risk.

While partnering with a hard money lender can provide numerous benefits such as quick access to capital and flexibility in terms of credit requirements, it is important to consider the costs associated with these types of loans.

One of the main costs associated with hard money loans is the high interest rates. Hard money lenders typically charge higher interest rates compared to traditional banks or financial institutions. This is due to the increased risk they take on by lending to borrowers with less than stellar credit or financial history. Additionally, hard money loans often come with points, which are upfront fees based on a percentage of the total loan amount. Points can range from 1-4 or more, depending on the lender and the specific terms of the loan.

Other costs to consider include origination fees, processing fees, closing costs, and potential prepayment penalties.

To help with all of these questions and more, we've put together this handy guide on evaluating fix and flip properties.

Typical terms for a hard money loan include a short duration, often ranging from six months to a few years, tailored to the quick turnaround needs of real estate projects. Interest rates are generally higher than traditional loans, often between 10% to 15%, reflecting the increased risk to the lender. Loan-to-value (LTV) ratios typically range from 80% to 90%, meaning the loan amount is a percentage of the property’s purchase price, plus 100% of renovation costs, ensuring the lender has sufficient collateral. Points or origination fees, usually between 1% to 4% of the loan amount, are also common. Repayment terms can vary, with some loans requiring interest-only payments during the term and a balloon payment at the end. Flexibility in terms can often be negotiated to fit the specific needs of the borrower and the project.

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