Teach me about Hard Money.
Investor · Saratoga Springs, UT · Member since 2018 · 61 posts · 37 votes
Teach me about Hard Money.
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Rental Property Investor · Chicago, IL · Member since 2015 · 275 posts · 271 votes
5y@Ben Stoodley - Covered a lot of good points.
1. Wether you have to wait 6 months on seasoning will depend on if you do a refi with a residential lender or commercial lender. A residential refi on a rental property will NOT require a 6 month seasoning but ONLY the amount of loan principal + Rehab loan that you look on the front end will be able to be refied. Example if you borrowed $ 100K for purchase + 30K for rehab then that will get refinanced within 6 month with a Residential rental product. Another thing to keep in mind is that generally you will get the refi amount 75 % appraised value or initial loan. (LOWER OF THE 2 Amounts) Basically you can do a rate and term refi in less that 6 months. A cash refi will require a 6 month hold time.
Commerical lenders to the most extent are making you wait for 6 month seasoning. This was not the case pre corona crisis. The 6 month requirement will be waived if you have a small bank that you have a relationship with in your area. Most large commercial lenders are making you wait if you want to refi and get 75% of of appraised value. (This 6 month requirement will soon go away but the products are not yet released but very soon will be available)
2. All Hard money lenders will require monthly payment only exception will be some private lenders if you know them may let you pay at the time or refi or flip.
12 Replies
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
most require payments and cash down
and most lenders require some sort of seasoning before the refi.
- Investor · Saratoga Springs, UT · Member since 2018 · 61 posts · 37 votes5y
Thank you Jay. I understand the cash down and am ready to do that, I was mostly curious about the interest only monthly payments being done every month or accumulated for a lump sum payment at the end; it makes sense for them to be taken monthly as the risk is much greater to wait.
When the rehab is financed, do hard money lenders (HML) escrow the rehab amount? Normally how are funds drawn? I imagine I would provide a rehab schedule separated out by phases, I would pay for the rehab for that phase, the HML would receive the invoice when complete, send an inspector to review the work, and then reimburse me for the rehab. Does this sound correct, or is there another way that the rehab is financed with Hard Money?
- Lender · Member since 2018 · 617 posts · 275 votes5y
Hi Mario,
Coming from the lender side of things, I've seen this product before, although it's quite rare. You are correct in that it entails more risk on the lender side.
Typically, you complete a portion of the construction, request an inspection, and then funds are disbursed based on the work that has been completed. Many hard money lenders will advertise "100% rehab financing", which is technically correct, although you will need to float the first construction draw, as hard money lenders typically fund the rehab on a reimbursement basis like the above example.
Hope this helps!
Michael
- Investor · Saratoga Springs, UT · Member since 2018 · 61 posts · 37 votes5y
@ Michael Kinsella, thank you. Does the work that the Hard Money lender pay for have to be performed by a licensed contractor? Or can I, as the owner, do some of the work and have them reimburse me directly?
Also, since you work for a lender, is seasoning required before I am able to refinance out of a hard money? If so, is this mandated by laws and regulation, or is it more of a preference by each lender? The reason I ask, is that I would like to refinance as soon as construction is complete in order to limit the interest only payments to a minimum and move the asset to a conventional product, but want to know how much time to calculate in my hold projections.
- 5yBen StoodleyBusiness MemberLender · San Diego, CA · Member since 2014 · 266 posts · 161 votes
@Mario Cuartas all good questions. From my experience, I would say most HML have NO prepay penalty. Meaning you can refinance whenever you want. Some of the bigger corporate lenders may, because they're similar to a bank. I don't know if any private lender that has a prepay penalty, paying off a loan quickly is a good thing in my eyes!
Rehab requirements will differ greatly from lender to lender. Most will be reimbursement style as mentioned. Most will charge $150-$250/draw inspection + a wire fee.
Using a licensed GC depends on your experience and the specific project. I would think the bigger the project the more likely all lenders will require a GC. If you have a lot of experience and it’s a straight forward, mostly cosmetic flip, than maybe they won’t require the actual GC.
A lot of these decisions come down to LTV. If you are putting down more money than you will have more flexibility with the loans. The lender is your partner, so the more you work together - the better the rates and requirements will become.
- Investor · Saratoga Springs, UT · Member since 2018 · 61 posts · 37 votes5y
@Ben Stoodley, Thank you. This is the first time I am hearing about the draw and inspection fees, so I am glad you mentioned it.
- Realtor · Chicago, IL · Member since 2017 · 42 posts · 20 votes5y
@Mario Cuartas
In my experience, you get your rehab funds in escrow based on your SOW (scope of work) and that's attached to your purchase loan along with your 20% or so down payment. Depending on the lender they will want to review and approve your SOW to achieve the target ARV. When you draw the funds you'll pay a draw fee. So you'll have to be smart on when you make your draw. So work with your GC with that.
- Investor · Saratoga Springs, UT · Member since 2018 · 61 posts · 37 votes5y
@Brennan Crick Thank you for sharing from your personal experience. Have you ran into any challenges refinancing quickly (less than 6 months) after completing the project. I have contractor that usually requires 25% down and the rest at the completion of the project, so I will only need to have one draw if i play it correctly and am able to cover the initial 25%. Is that a smart way to do it, or would you recommend more frequent draws. Also, I imagine this varies by lender, but lets say construction takes longer than expected, do you have any idea for how long the draw period is open for - is it for the duration of the term or do they give you tight schedule timelines that it needs to be finished by?
- Realtor · Chicago, IL · Member since 2017 · 42 posts · 20 votes5y
@Mario Cuartas
The refi seasoning period is based on lenders. You’ll have to network around to find one that will refi whenever if the numbers are right. The for daws with no upfront payments, You’ll have to find and work with your GC and tell them how you are financing the rehab with a lender. If you tell them you are doing draws from the start they might work with you on that. The good contractors have Lines of credit to front the materials
- Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes5y
Total remodel in what city? Talk with county planning about time span for permits and inspections, this may make your idea of refinancing in six months not possible unless is simple cosmetic fixes. There is no time limit on refinancing into a conventional loan. You qualify with credit, income and the subject property with a rental agreement and deposit banked to close. Hard money can be whatever terms the lender feels comfortable - if this is your first deal with an entity expect to play by their rules only. Contractor willing to accept 25% payment then 75% at end, I have to cough there and wonder, who is buying materials- buying a refrigerator right now takes a while to get it delivered expect delays with materials unless they are on the shelf at Home Depot- deliveries because of Covid are slow. Hard money with new investor on a major rehab construction project -I would expect you to get 12 months at 12-13 percent rate with a renewal and more fees if you need longer. They will charge for: change requests, inspections, any title messes, and payoff fees.
@Mario Cuartas
Refi seasoning will depend on the new lender not the hard money lender. Seasoning is typically only neccessary if you want to refinance based on a higher appraisal rather than the price you paid. So as long as you are not trying to cash out, seasoning may not be required.
Seasoning is also very bank dependent. Tslk to your local banks and credit unions and ask what are the rules. Some of them will service their own loans and have flexibility especially if you have accounts with them.
Lenders can also have prepayment penalties. The hard money loan i took out had a six month prepayment penalty so it would cost me atleast 6 months interest.
- Rental Property Investor · Chicago, IL · Member since 2015 · 275 posts · 271 votes5y
@Ben Stoodley - Covered a lot of good points.
1. Wether you have to wait 6 months on seasoning will depend on if you do a refi with a residential lender or commercial lender. A residential refi on a rental property will NOT require a 6 month seasoning but ONLY the amount of loan principal + Rehab loan that you look on the front end will be able to be refied. Example if you borrowed $ 100K for purchase + 30K for rehab then that will get refinanced within 6 month with a Residential rental product. Another thing to keep in mind is that generally you will get the refi amount 75 % appraised value or initial loan. (LOWER OF THE 2 Amounts) Basically you can do a rate and term refi in less that 6 months. A cash refi will require a 6 month hold time.
Commerical lenders to the most extent are making you wait for 6 month seasoning. This was not the case pre corona crisis. The 6 month requirement will be waived if you have a small bank that you have a relationship with in your area. Most large commercial lenders are making you wait if you want to refi and get 75% of of appraised value. (This 6 month requirement will soon go away but the products are not yet released but very soon will be available)
2. All Hard money lenders will require monthly payment only exception will be some private lenders if you know them may let you pay at the time or refi or flip.
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