Many real estate investors turn to private hard money lenders because they can provide quick and short term financing, require less paperwork and less stringent qualifications. Oftentimes, these money men lend to individuals who do not qualify for a traditional loan because of bad credit rating and other similar circumstances. This exposes them to higher risks of default. To offset this, they have laid their own terms when lending money. Of course, these terms vary from one lender to another, but nonetheless, they share more or less the same lending yardstick. Before using private hard money, let us take a look at the answers to questions pertaining to the terms of private hard money loan to find out if they fit your needs.

Private Hard Money Lenders Image via Wikipedia

1. How Much Can You Borrow From Private Hard Money Lenders?

This can be answered using the Loan-to-Value or LTV ratio. Usually, you can borrow by as much as 70 percent of the After-Repair Value (ARV), meaning, you can borrow 70 percent of the value of the property in its repaired state. For example, let’s say, you come across a house valued at $40,000 in its current condition, requiring $15,000 in renovations. After the rehab,

its value is expected to rise to $90,000. So when you take out a loan fr

om one of the private hard money lenders, you can borrow as much as $63,000. This amount is sufficient to finance the cost of the property and the restoration.

2. How Much Does Private Hard Money Cost?

These costs are represented by interest rates and upfront points. (You may also check out our post specifically for this topic.)

Interest Rates. The interest rates for private hard money loans can range between 12 and 20 percent per year. These are obviously higher than what you can get from traditional banks since they take in risky loans that traditional ones decline.

Points. Naturally, these figures are also higher for private hard money lenders than traditional banks and lending institutions. Since these non-conventional financiers readily embrace the greater risks, they exact higher returns. These fees make up for the time and resources of the private money lending institution, and for the returns of its investors.

A lot of real estate investors do not mind these higher costs as long as they get funding fast so that they can quickly keep up with great real estate opportunities that come their way.

3. For How Long Can The Private Hard Money Loan Last?

Real estate investors often use private hard money loans as quick source of short-term financing. Once they acquire the property, they refinance to get friendlier terms from traditional lenders. The loan period can last between six months and several years. Besides the loan period, also find out from your private hard money lender how soon you can get access to financing as this makes all the difference to help you make quick decisions and seize opportunities in good time.

4. What Are Other Fees and Things To Watch Out For?

One thing you should make sure is to pay off the loan as soon as you can to save on interest. However, be careful and first find out if the private hard money lender you are dealing with charges prepayment penalties. That is, you pay them fees for terminating the loan earlier than the stipulated loan period by fully paying off. These amounts can make a dent on your deal and seriously slash your returns. So better find out first if paying early can do more harm than good.

5. What Paperwork Will Private Hard Money Lenders Require?

Good old fashioned private hard money lenders bank on the viability of the deal and the property as collateral. That’s why all they do is take a look at the property rather than the financial standing of the borrower. However, these days, perhaps due to the economic landscape, there are private hard money lenders who would ask you to accomplish a credit application which may require W-2’s, tax returns, bank statements, and your latest pay stubs. This is to cushion them from more risks.

While private hard money lenders provide quick and virtually hassle-free loans, it is vital for borrowers to first familiarize the terms that their particular lender have.

Avalanche of Money Lenders Replaces Customary Lunch with Private Investors

Luncheons with a coterie of investors with deep pockets used to be the avenue that lead real estate investors to the Land of Ready Cash. Today, however, more and more private lending companies are purveying rehab loans to rehabbers and real estate investors who want to renovate their rental properties. The government is also offering rehab funding with terms and conditions varying from city to city.

A real estate investor does not have to go far to look for a rehab loan. Skipping the need for leafing through the menu of the restaurant where private investors’ money were used to be raised, a cash-hungry real estate investor can instead browse the Internet for a list of lenders for this kind of loan. For the newbie, however, selecting the lenders to transact with could be overwhelming.

What Do You Need The Money For?

When deciding on which type or source of rehab loan to choose, keep in mind your purpose of your loan. Are you about to buy a handyman special or bid on a foreclosure? Do you plan to do up a rental property? Would you be willing to rent out your property to low income families? Do you need the cash immediately? Look for the kind of rehab loans that best suit your needs.

Where To Get Rehab Funding?

Banks. Most banks and lending companies shy away from rehab projects. Some local banks may offer rehab funding but the red tape, sluggish rate of approval and high credit rating requirements that go with bank loans often discourage real estate investors from seeking funding from these institutions. If you are looking to buy a handyman special, you may want to look for other sources of rehab loans that can provide you with faster funding.

Government Grants for Rental Rehabilitation Programs. This is for the socially responsible landlord who is willing to rent out affordable, decent, safe and clean housing for low income families. If your property is located within the given city boundaries and could accommodate at least 10 families, then you may apply for this forgivable deferred loan which funds up to 50% of the total cost of renovation. Other certain conditions you must agree with include renting out the rehabilitated property to tenants below 60% median income, setting maximum rental rates per unit, annual reporting of tenant income and other rental information, and organizing the annual maintenance inspections to be done by the city. Owner occupied units are not included in this program. Provisions for this type of program may vary from city to city.

Private Investors/Hard Money Lenders. This type of lenders still remains to be the fastest source of funding for real estate investors. They can lend you 100% of the acquisition, rehab and closing costs, they require less paperwork and more lenient about your credit rating. However, these conveniences come with a dear price tag. Be prepared to pay at least 15% interest and at least 10 points or 10% fee which is added to the amount loaned. This is suited for real estate investors dealing with a motivated seller or bidding on a foreclosure or estate sale, since the ability to move quickly is of the essence here. Just make sure you have done your due diligence.

With many competing hard money lenders springing up, some have refined their terms into more borrower-friendly provisions. It is better for you to obtain financial sources that do not exact prepayment penalties. Not only are they expensive, they may also hamper your momentum for moving quickly. If you have a good credit standing, opt for private lenders who offer real estate investor-friendly programs such as the “6-Month No-Pay Plan.”

So, which source of rehab funding will you be turning to?

Short-Term Loans

Hard Money Lender

A hard money lender makes short-term loans based on the value of an asset, in this case a property, with little regard to the borrower’s credit and/or finances.  Hard money lenders charge higher interest rates than standard banks due to the high risk nature of these loans.  Unlike traditional banks, hard money lenders can provide funds quickly, usually in 10-14 days, to purchase and rehab distressed properties.  These properties can be in need of significant repairs or be in various stages of foreclosure. This makes these loans popular with first time real estate investors that have little working capital or poor credit scores.  Look to use hard money loans to rehab foreclosures as your means to purchase and rehab your first couple properties.

Rehabber Loans

Hard money lenders will only provide loan terms of 4 – 6 months at which time the investor has to sell or refinance the property.  It is EXTREMELY important that the first time rehabber have a rock solid exit strategy, otherwise his rehab investments will soon belong to the lender.  Not having a SOLID exit strategy is the biggest and most common mistake that a newbie home flipper can make when utilizing hard money.  If this happens to you, work with your lender to get at least a 6 month extension and ask them for referrals to end-lenders that specialize in refinancing these situations.

In order to refi the hard money loan, you will need to find an investor friendly lender that has no seasoning requirements and will appraise the property in its newly remodeled condition and not at its most recent sale price.  Also, do not list the property on the MLS (multiple listing service) if you are planning to refinance.  Lenders will not refinance a property that is currently for sale.  The bottom line is that you either have to have the property pre-sold pending completion of repairs or have guaranteed refinancing in place.  Otherwise, you are setting yourself up for failure.

A typical hard money lender will lend up to 65-70% of the after repaired valve (ARV) of a distressed property.  The ARV is calculated by the lender’s appraiser and is based on an expedited sale scenario in case the lender has to foreclose on the property and resell quickly.  This gives the lender the safety margin needed to minimize their losses when things turn sour.

100% of Rehab Funds

The lender will typically provide 100% of the rehab funds needed to make the property saleable or rentable as detailed in your rehab estimate that you will provide to the lender.  This rehab estimate needs to correctly address the rehab plan in its entirety.  It is very difficult and time consuming to ask for more money in the middle of a project because you missed something in your initial estimate.  It often makes more sense to fund that portion out of your own pocket if possible.  Otherwise you most likely will be waiting for another appraisal and/or underwriting (or committee) approval for the additional funds.

The rehab funds will disburse in 3 – 4 draws as work is completed throughout the project.  Most hard money lenders will not issue your first draw until a portion of the home rehab has been completed.  Work with your contractor to have him put up the initial money to start the project.  If your contractor refuses or says he has no money then you shouldn’t be using him in the first place if he is that poor.  Be wary of giving unknown or untested contactors money upfront in order to start construction.  You will get burned eventually.

High Interest Rates

Depending on the lender, the down payment will vary from 0 – 10% of the purchase price and the origination points will also vary from 0-10% of the purchase price.  Interest rates will typically vary from 13 – 18% and will be charged on a monthly basis on your outstanding balance (only the money you have actually used).

Hard Money Loan

Hard money lenders vary greatly so the newbie rehab investor must shop around to find the best programs out there.  Local rehab clubs and real estate investment groups are a great source for finding hard money lenders you can trust.  Be wary of unscrupulous private money lenders and expert real estate investors that drive themselves around in their own limos.  This may sound funny, but you wouldn’t believe how many crazy people are out there.  Stay away!

I have personally purchased HUD foreclosures with only $500 out of my pocket using a hard money lender to finance the whole project including all closing costs.  Once you have some cash in your pocket, look for cheaper ways to finance your deals.  Community reinvestment banks are who you need to develop relationships with next.

Example of Hard Money Financing:

After Repaired Value (ARV) is $90K

70% of the ARV is $63,000.

As long as the total loan amount is less than $63,000 the deal will work.

Bank foreclosure (REO) purchased for $25K

Rehab Estimate is $30K

10% down payment on purchase price is $2,500

4% origination is $1,000

Closing, attorney, insurance, titles fees – $2,000

Total loan amount in this case would be $55,500 (assuming the lender rolls in closing costs and points).  This deal will work every time.

Note: Remember to subtract your down payment from the calculation of the loan amount.  Depending on the tax pro-rations (in most states the seller has to give you the prorated amount for the current year’s taxes) you may not have to bring the full down payment to the closing table.

Related articles

• What you must do PRIOR to Obtaining a Hard Money Loan

Hard Money Loan Image via Wikipedia

Smart investors will get pre-approved to refinance their hard money loan prior to obtaining the loan!  Hard money lenders are not in the business of lending their money for the long term.  They will not refinance your project once complete.  Even if the plan is to sell the property for a handsome profit, one never knows what may happen so be prepared to deal with any scenario.

Rehab finance is not a topic that every mortgage broker or banker is familiar with.  I have learned this lesson the hard way and almost lost a property due not being able to find a suitable end lender for my first rehab project.  Especially in today’s difficult financial and real estate market, the rehab investor MUST have a solid exit strategy when using short term loans.

I once thought that if I bought a property at large enough discount that the profits would take care of themselves.  I learned that finding foreclosures at dirt cheap prices is not as difficult as actually selling the finished product for profit.

Most new real estate investors have little money to start with and will get into the rehab business to fix and flip foreclosures for quick cash.   Using hard money is an excellent way to get started, but make sure to understand the rules of the game.  There no such thing as a sure sale in this industry anymore, so one must be ready to refinance and rent out the home if a sale is not possible.

Here are the key issues that must be discussed when looking for an end lender that can refinance a hard money loan:

• Make it clear that you are trying to refinance a property that you have owned for less than a year.  Most banks have seasoning requirements of one year prior to obtaining a cash out refinance.

• Do not list your property on the MLS (multiple listing service) while you are trying to refinance your project.  Banks do not like to refinance properties that are currently for sale.

• Make it clear that you have rehabbed the property and that you need an appraisal based on the improvements made.  Most refinance programs will only want to value your rehabbed home at the most recent sale price if has been less than a year since your purchase.

• Understand how much cash in reserves you must show in order to refinance.  Most banks are requiring 6 months in reserves for mortgage payments, taxes, and insurance.

• Most banks will only consider 75% of the rental income when calculating your debt to income ratios.

• Find out what is minimum credit score needed for your refi situation – these requirements have gone up substantially.

• Find out exactly what proof of income and assets will be required.

Always be 100% upfront with these and all other items regarding the loan.

Banks have been tightening their lending guidelines and policies and unfortunately the easy money programs have all been eliminated.  This makes it all the more important to develop a relationship with an investor friendly community bank that caters to real estate investors and rehabbers.

Related articles

• Why Use Private Money for Your Rehab Financing Needs?