Question about a hard money loan.

8 Replies

I may be currently in the market for a hard money loan since the house I am looking at is cash only. I have a few question, how would you go about finding are hard money lender in the Orlando,fl area And what are good terms to have by a HML? Let me see if I understand how hard money works correct me if I’m wrong or if I’m missing anything, let’s keep the numbers some.. On 100,000 loan I basically pay 1% interest ($1,000) the loan is for 6 months (until I refinance) so that would be $6000 then i refi and pay the loan in full, what else am I paying in a hard money loan? I know they usually cover around 75% if the appraised value, but what about repairs?

@Logan Larochelle

65% to 70% of ARV This would normally cover purchase and repairs. Anything above that would have to come from your own cash.

12%+ interest, so around 1% interest per month.

4-6 points up front.

Balloon payment at end of 6 months.

They will only loan to an LLC, not for personal residence.

Chris could you give a example of how much a 100,000 hard money loan would cost in total after 6 months.. with the points etc..

4-6 points is $4000-$6000. At 12% interest for 6 months, that $6,000. Add the two, and you get $10,000 to $12,000. The doesn't include your other costs like insurance, taxes, etc.

@Logan Larochelle

Hard money is going to be from 8-12% interest and 2-4 pts, depending on experience and price points.  Most lenders also have some kind of application fee, doc fee, underwriting fee, processing fee, etc.  I've seen it range from $500 to $1,500.  This is in addition to an appraisal.

If you have a $100k loan at 12% interest and 4 pts with $1,000 fee and $400 appraisal, in 6 months, it's going to cost you $6,000 in interest, $4,000 in points, and $1,400 in total fees.  Your total loan costs will be $11,400.

You mentioned 75% of ARV, but HMLs mainly lend on cost, which is both purchase and rehab. All lenders have two percentages:

  • LTC (loan-to-cost) is based on purchase price and rehab
  • LTV (loan-to-value) is based on ARV

Let's say your lender finances 90% LTC and 70% ARV; your actual loan amount is going to be the lower of those two. For example, a deal with $70k purchase, $30k rehab, and $150k ARV:

  • 90% LTC = $90k
  • 70% LTV = $105k

In this case, the 90% LTC is lower, so your loan amount is $90k and your down payment is $10k.

Let's say ARV was $120k. Then:

  • 90% LTC = $90k
  • 70% LTV = $84k

Here the LTV is lower, so your loan amount would be $84k and down payment is $16k.

The LTV percentage only affects you if you have a bad deal. $70k purchase with $30k and $120k leaves little room for profits; the costs are 83% of the ARV. BP preaches the 70% rule here, and if you follow that, then you'll have a good deal and never have to worry about the LTV.

since the house I am looking at is cash only

Hard money is not cash.  Even with hard money you still need to write your offer as financed, not cash.  

@Logan Larochelle I hate to disappoint you. You've come to the right place to learn, but unfortunately, you're not in a position yet where a HML is going to loan you money for your deal, as you simply don't have the experience and understanding of the business. HML's points, fees and terms can vary tremendously, some will require monthly interest payents and others allow them to be paid at the end. Some HMLs want full blown appraisals, others will go off of comps, or their experience and knowlege of a market. The devil's in the details, and it's important to understand how they all work together.

Remember, lenders are putting their money out there at risk. They want to make sure they mitigate that risk as much as possible. If someone is short on experience, they need to have more of their own money (skin in the game) into the deal, and a very solid deal. 

I'd suggest in your situation you find someone to partner with to start out, or go to work for someone doing deals and learn the business. Shore up where you are weak. Good luck. 

Hi @Nghi Le , I have a question. In your example with the 150k ARV, it is assumed that with the 90% LTC, the borrowers down payment would be 10k, not including any points, fees, or anything else and the 10k would be used to "finish" the loan, lenders 90k + borrowers 10k = 100k total money needed. I read here and on lenders websites that they loan 100% of purchase and rehab with a down payment of lets say 20%. the question is, does this mean they have a 80% LTC and use the borrowers 20% to "finish" the total money needed or does that mean they have a 100% LTC and the down payment of 20k is profit for the lender?

@Jim Shack

Down payment and cash-to-close are two different things.  Cash to close is usually the down payment, points, any other lender fees, prepaid interest and insurance, and your standard closing costs.  To actually finish a project, I'd recommend setting aside at least 6 months of interest payments and 10-20% of the rehab cost (since you'll be fronting the money to start the rehab before getting reimbursements).  I personally wouldn't put anyone into a hard money loan unless I see they have enough funds to survive through the rehab and a solid exit strategy.

A 20% down payment with 100% LTC sounds really odd.  If they're providing 100% finance, you shouldn't need to put any down payment.  But usually, those 100% down payment programs charge you hefty fees and may want you to front the interest reserves.

A valid reason I've seen for putting some money down and getting a loan on 100% of the total cost is for people planning to hold onto the property (as opposed to selling it).  The 20% down payment is basically collateralized into the loan.  This allows an investor to avoid having to wait 6 months for a cash-out refi to pull their money out; they can just do a rate and term refi anytime.  Very few HMLs do this; I've only seen my local ones do it, but never the national ones.

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