hey all, as a new investor i have been reading up onbhard money loans so i figured i would ask on here if any one could break it down in lay mans terms for me please. I am especially interested in any costs that may be needed to acquire a loan such as down payments or any other fees and also is there typically a grace period before you begin making payments.
Any and all answers will be greatly appreciated.
Welcome! Hope everything has started off well for you so far. Finding a reliable and proven hard money lender is a process. I suggest starting this process now, as it seems like you are, and continuing it through your first few deals. Find a lender that is a great fit for your business and you will be very happy. Here are some tips on finding a good HML:
- DIRECT Lenders: I strongly suggest working with direct lenders to avoid the possibility of your deal falling out due to financing changes. Direct lenders should also be able to close very quickly after commitment, 3-5 days.
- LTV: you'll need to ask to see their underwriting matrix on how they determine your max LTV and from that how they determine your rate and fees. Generally, most lenders will go up to 65-70% ARV. This will generally be compared to the LTV of the purchase price as well. Most all lenders will require some "skin in the game" or a downpayment.
- Down Payment: I've seen as low as 10%, 20% is more common, and 30% is a safe number to prepare for. These percentages are related to the purchase price. Most lenders will finance all of the rehab expenses as well (make sure they do).
- Rates/Fees: every lender is different and determines rates from different variables. Generally speaking, the higher the LTV, the higher the interest and fees.... the less experienced the borrower, the higher the interest and fees... the less amount of supporting comps, the higher the interest and fees. Basically, higher risk = higher rates/fees.
- Junk Fees: need to call each lender and ask what all associated fees will be applied to the loan. They tend to be processing, appraisal, draw, underwriting, carrier, etc named "fees" , all unnecessary.
- Asset Based: most all hard money lenders are asset based, just confirm to see how they underwrite deals and determine rates. Ask if there is a min credit score or if any proof of income is needed.
I hope this helps you out when searching for good HML in your area. Always call the lender and talk it over with them. They are almost always asset based, so they'll need to see a deal in order for them to produce a quote. However, you should be able to figure out any junk fees, pre payment penalties, etc. to cross some lenders off your list.
Thanks alot for the info Ben. I will be calling around to get more information.
I have just a few items to add to Ben's great tips on hard money loans:
DIRECT LENDERS: A lot of hard money lenders say they are direct lenders when in fact they sell the note after funding. Make sure they will hold the loan through maturity or you won't know who your lender really is. Also find out if they service their own loans or transfer that to a third party. Many mortgage brokers that claim to be direct lenders actually broker their loans, to one or more trust deed investors, after closing.
JUNK FEES: Make sure your lender does not charge reconveyance fees or other little fees throughout the loan process (i.e. recording fees, notary fees, overnight fees, etc). These little fees can add up to hundreds of dollars.
SHORT FUNDING: Many lenders short fund at closing, meaning they deduct the loan fee, prepaid interest and other fees from the amount they fund to title at closing. Remember, whatever the lender does not fund, you will need to cover at closing and you don't want to be short at the last minute.
GRACE PERIOD: By "grace period" I assume you are referring to when your first interest- only payment will be due. We collect the interest due for the balance of the month we fund a loan (if a loan funds on the 1st of June, we short fund 30 days of interest - if a loan funds on June 30th, we short fund only 1 day of interest). Because we collect interest in arrears (i.e. interest for the month of June is due on the first of July), and because we collected June's interest at closing per the example above, your next interest-only payment would not be due until August 1st.
Best of luck!