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10 Questions on Hard Money Loans

by Troy Schuricht on February 21, 2008 · 20 comments

  
  1. What is the process for Hard Money Loans?
    Hard Money Loans provide Investors access to capital to purchase investment properties. They can fund quickly, typically within 72 hours of receiving the final docs from the Title Company. Hard Money is available for adequately collateralized loans on single-family residential houses and other Real Property including commercial projects.

  2. What is the interest rate?
    The interest rate depends upon the Lender. The rate will range from 10% interest only to 18% interest only annual interest rate payable monthly in most cases. Some Lenders will defer interest payments to payoff, benefiting investors that do not want payments during rehab.

  3. What Loan-to-Value are Hard Money Lenders looking for?
    Typically a loan does not exceed 70% of the after-repaired-value (ARV). This figure is calculated by an appraiser and consideration of repairs.

  4. How long is the loan for?
    Typically write the notes from 3 months to 12 months depending on the Lender and your needs. Longer the term can lead to increased costs or interest rate.

  5. What are the costs?
    All loans will require Title Policy, Insurance, and Appraisal. These services come with fees that can range from a few hundred to a couple of thousand dollars. Most require origination points ranging from 2 to 10 points.

  6. Can I get money pay for repairs?
    Yes. Most Lenders require a “Draw Request” form to be filled out to identify the completed repairs to the property, copies of the invoices from the contractors or sub contractors. After work is inspected, draws can be dispersed. Typically work is not paid in advanced.

  7. Does my credit matter?
    Maybe. Hard Money Lender do check credit, not necessary for credit scores, but to check for bankruptcies, foreclosures, charge offs and collections. They look for ability to repay. The loan is more collateral based, which means they look really closely at the property.

  8. Do I need to put any money down?
    In most cases, Yes. Most lenders want to ensure that you have enough resources to finish the repairs and cover the costs of the loan plus any surprises. Expect to pay all origination/discount points and other costs at or before closing. If you cannot afford to close you typically cannot afford to take out this type of loan.

  9. Can interest to be deferred to the end of the loan?
    Sometimes. Most have interest payable monthly. Again, if you cannot afford to close you typically cannot afford to take out this type of loan.

  10. How does Hard Money compare to a traditional non-owner occupied investor loan?
    This would be like comparing apples to oranges. Hard Money has a very specific purpose. Typically these loans are for quick turn around or after repair situations. Conventional financing is used for your traditional rentals and long term hold scenarios. As the foreclosure market increase you will find investors to use Hard Money as way to secure the property in a short period of time then refinance into Conventional finance.
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{ 19 comments… read them below or add one }

Joshua Dorkin February 21, 2008 at 10:00 am

Great post, Troy! I think this one will be very helpful to all of the HM newbies out there!

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Rick Marnon, Howell February 21, 2008 at 5:59 pm

This is a really big deal to those that are just getting started in the investement side of things. Great idea to let newbies know about this as an option.

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Handyblogger February 21, 2008 at 10:32 pm

Great idea to let newbies know about this as an option.

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Jim Boyer February 22, 2008 at 10:01 am

Nice article, I have used a hard money loan before. Not something that I would want to hold for more than a few months, but it worked well for a investment property that needed to be closed on in 6 days or it would be foreclosed on.

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Tom February 23, 2008 at 7:56 am

Wow great article, i love your opinion!

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Nadine February 28, 2008 at 4:58 am

Nice post…Great guidance before taking loan. Those are very clean and useful.

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MoneyMan March 12, 2008 at 11:20 pm

Excellent tips Troy. Hard money loans are for a specific purpose and should be replaced with a conventional mortgage if your intention changes to a long term hold.

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yanni raz July 21, 2008 at 8:18 pm

First of all I want to make sure that you’re familiar with the term Hard Money.
Hard Money is Money Loaned to you by private investors, these private investors can be from anywhere but normally the Hard Money lenders would want to work within their own state, so if you’re from California than you want to find an investor in California.

So what type of Hard money loans the Hard Money Lenders will do?

The First type of Hard Money Loans lenders are offering is Construction Hard Money Loan.
In construction Hard Money Loan the Hard Money Lender will loan the borrower the money in stages, example: You own a land in Los Angeles California, on that Land you want to build a house, you have the Plans approved by the city of Los Angeles and you’re all ready to go, now you need a Hard Money Loan because it will be easier to qualify and get the money you need for the construction.
You will call a Hard Money Lender and give your information, the approved plans, your financials, your budgets for the construction(you can get it from your contractor), then lets say the Hard money Lender agrees to Loan you the money you need, but the way the Hard Money Lender will Loan you the money is by stages, and the stages are:
When your Contractor will finish the foundation, the contractor will get paid after inspection that is done by the Hard Money Lender $10,000 for the foundation work. Than when your electrician finishes the electricity in the house, than the electrician will get paid after inspection done by the Hard Money Lender another $7000.
You understand the concept?
Everybody by the completion of the construction will get paid by the Hard Money Lender.
Why the Hard Money Lender do that?
Because he want to have control of the money, private investors know the risks they’re taking but they’re still willing to take these risks only if they have 100% control of the money.

Why Hard Money Lender will choose to Loan money to Investors and not Homeowners?

This is a very good question that a lot of people should know the answer for.
The Hard money Lenders wouldn’t want to have to take a homeowner out from his home because he didn’t make the payments, but with investors it’s different, it’s 100% business and that’s what the Hard money Lenders want- Business.
What type of properties Hard money Lenders will Loan money on?
A Hard money Lender will Loan money to many type of properties: Single Family Residents, Condos, Townhouses, Apartment Buildings, Hotels, Motels, Office Buildings, Shopping Centers and many others.
What hard money Lenders don’t like, it’s Land. It will be very hard to find a Hard Money Lender that will Loan you money on a Land, and the reason is because there is no income to Lands, maybe you can get a Hard money Loan on a Golf Course or maybe a Land that you about to develop something on, but raw Land- Forget about it.
Today Hard money Lenders Loan more money to Commercial Real Estate investors rather then to residential investors and the reason is Less risk.
Today the Residential market is not going up, Values of Homes are actually going down by more than 30%, and every day more foreclosures are coming out on the market, so the Hard money Lenders are smart enough not to participate in taking risks with homeowners.
Commercial Real Estate is still very competitive, investors are still buying properties, remodel properties and build new properties.
The Commercial Real Estate market is still alive just like it was in the residential market 3 years ago, and Hard money Lenders are still in the game, and now they’re busy more than ever because the Banks don’t Loan money that easy to borrowers.
So it’s Commercial Properties rather than residential properties, and Construction Loans.
Good Luck

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Paul July 31, 2008 at 2:10 pm

Hard money loans are a good idea if you need a short term loan. I agree with the person above about not holding them long term.

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Susan September 4, 2008 at 3:46 am

Excellent summary. A hard money loan can be a good option for short term with flexibility in interest rate and credit scores.

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Jay Money September 9, 2008 at 6:04 pm

Too bad hard money is drying up. It’s getting REALLY hard for borrowers to get ANY type of loan. The market right now is getting much worse in many parts of the country. Best of luck out there if you’re looking for funding!

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Shane October 26, 2008 at 10:36 pm

Good, it was just like reading the forum!!
Anyhow these answers will help to remove Some doubts who wants to invest and to know about hard money..

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Michael Murray July 28, 2009 at 4:56 pm

We sometimes make hard money loans. The information given has been quite good and quite accurate. Hard Money is sometimes easier to get (no qualifying can be available with good security)is much Harder as to terms i.e. interest, ARV, Points, Fees, overall cost compared to so called conventional or soft money…where terms and conditions are softer or easier on the borrower often because there are safeguards built into soft money loans that are significantly less risky than are the typical Hard Money Loans. Remember that Hard Money lenders take higher risks so they expect higher returns to offset those real risks.

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Hazel Wright August 11, 2010 at 9:22 am

I would still prefer hard money as a great alternative to banks. It’s much convenient and fast! Though it’s not easy to find the best hard money lenders to provide you with the right rate.

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steve werner November 10, 2011 at 8:13 am

Great explanation.

People tend to get freaked out when they here the term Hard Money.

A little education = a big opportunity

sw

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Seanellio May 18, 2013 at 9:55 pm

Perhaps the best part of a private money loan is that there is no credit check and no subsequent hit on your credit report. For an investor who likes to turn lots of deals, having to prove creditworthiness each and every time gets to be a bit of a hassle.

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Christimathews March 28, 2014 at 5:16 am

Great piece of information while availing for hard money. Implementing these would really keep a person in a safer side.

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Arturo Gallardo April 4, 2014 at 7:55 pm

Great Piece of information, does anyone knows of a hardmoney lender that would help rehab a property that i have under contract, great ROI.

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Brandon Turner April 4, 2014 at 8:05 pm

Hey Arturo, be sure to check out the BiggerPockets Hard Money Lender Directory for the web’s most comprehensive list!

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