Hard Money Lender-How they operate?

6 Replies

I had a few questions on HML-

1) Knowing I will most likely be buying a foreclosure that requires cash to purchase- Am I right in thinking I should qualify/Pre-approve with a HML first before finding a property? Or is it the other way around?

2) Lets say the property is 50K and they rehab is 50K. What are the typical terms? I know these vary and know I will need to bring money to the table just not sure how much

@Rigo V. This info might change based on you being in a different state than I, but...

I've worked with a HML on all my deals and I would say get pre-approved first so you know they will lend to you and you can include a pre-approval letter when you submit offers, which is a big deal with the market so hot.

#2 what really matters to the HML is that the project will hit their requirements on LTV vs. what they loaned you. In your example of $50k purchase $50k rehab; if the ARV is only $100k then they will only provide you with $20k for the rehab assuming their LTV requirement is 70% (most are right around 70-75% LTV of ARV). So with your two cost numbers your project would need to appraise for $143k or higher for the HML to provide you with $50k purchase and $50k rehab budget.

Terms can be all over the place. Recently, I've seen interest rates between 9.5-11% interest only for 9 months is what my HML offers. with roughly 5 points rolled into the loan on top of the normal closing costs. This makes them expensive as that just ate up some of your future equity in the deal. So be sure to do all of the math before submitting an offer.

Hope this helps! Let me know if you have any other questions

@BJ Everson thanks so much for your response

would they typically lend all 100K? Or do they lend something like purchase price + % of rehab? 

@Rigo V. As long as the project clears whatever benchmark the HML operates off of they will provide all the funds you need. So if your HML requires 70% LTV for what the property will appraise for after all repairs are made:

Purchase = $50k

Rehab = $50k

Total = $100k 

ARV needs to equal $143k or more ($143k *70% = $100k)

So if the HML thinks the property will only be worth $100k after your rehab then they will only provide you with $70k ($50k purchase and $20k rehab).

In CA the lender has first place on title, you hold second. Most want you put 50% down. A few may allow less down at higher interest rate.

@Rigo V. @Sam Shueh Sam is right, some HML's require some skin in the game. I missed that part b/c my HML actually doesnt require any down as they put a second position lien on your personal home as "skin in the game" vs your cash. Sounds risky, but if you know what you're doing and believe in yourself it is a non-issue.

There are alternative sources of lending which are not HML. The in between niche offers lower rates with no income verification. The points for the loan on a fix and flip are a lot less as well 2 points instead of 5 with rates as as low as 8.5%. ARV programs are in the works to roll out very soon.

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