An Introduction to Hard Money Loans
If you’re venturing into the world of income real estate or are looking to convert a distressed property into a saleable one, a bank loan may be hard to come by. If you are looking into alternatives for home financing or merchant funding, then a hard money loan may be exactly what you need.
What is a hard money loan?
What is a hard money loan, and what is hard money? A hard money loan usually bears a higher interest rate than a bank loan but can be quickly approved. Terms for hard money loans are usually 1 to 5 years. Hard money loans also have collateral requirements. These can include:
- Home equity
- Cash
- Securities and other investments
- Insurance policies
- Home equity
- Other properties
These kinds of collateral are all examples of hard money.
Why would I need a hard money loan?
Hard money loans are great for renovating properties or investing in other kinds of non-owner occupied real estate. You might need a hard money loan for investing in the following kinds of properties:
- Fix and Flip properties
- Rentals
- Multifamily properties
- Commercial real estate
Many of these are needed to bridge the property into a state where rental incomes can be earned. After this is done, a bank will be willing to offer a more traditional mortgage since the property has an income stream.
How do hard money loans work?
Hard money loans require that the borrower have collateral that can be posted and that the value of the property is of a high enough value in case the lender must foreclose. Usually, a credit check is performed, and a score of around 620 is sufficient for most lenders.
Hard money lenders are often either private individuals or a private lending company. There is less regulation for hard money loans, but there are also risks. Hard money loans typically close in two to four weeks. Hard money loans are not regulated by the FDIC or the NCUA—a fact you as a borrower should be aware of.
Hard money loans do have risks. The first is higher interest rates than bank loans: this is due to hard money loans usually having actual higher percentage rates as well as being of shorter terms, resulting in higher monthly payments. Interest rates average between 10% to 13%m and can go higher. Hard money loan rates can go even higher than this, depending on the nature of the hard cash loan.
Secondly, hard money loans have high upfront fees and commissions. This is to ensure that the hard money lenders can make money, even if the borrower pays off the loan early.
What is a hard money lender?
Here are 3 examples of the best top money lenders in the US. These are good places to start when you ask “what are the hard money lenders near me?”
RCN Capital
This company finances loans for fix and flips, multifamily and other rental properties and long term rental financing.
- Interest rates: 7.49%
- LTV: Up to 90% for fix and flips, 75% for rentals and 80% for multifamily
- Minimum credit score: 600, 10+ days to close
- Max loan amount: $5 Million
CoreVest
CoreVest has a wide range of finance products and supports fix and flips, rental bridge loans, and lines of credit.
- Interest rates: 6.9%
- LTV: Up to 90%
- Terms: 12 to 24 months
- Minimum credit score: 620 and closes in 15+ days
- Max loan amount: $5 Million
GroundFloor
This is an interesting company because they finance all of their loans themselves, and then present the loans on their platform for investors to fund. They offer all manner of short-term loans.
- Interest rates: 5.4%
- LTV: up to 70%
- Terms: 3 to 6 months
- Minimum credit score: 620 and days to close: 15+
- Max loan amount: $2 Million
What should I look for in a hard money lender?
You should look for these things in hard money lenders:
Reputation
This is the most important takeaway. Make sure to read online reviews, talk with friends who have gotten loans from various lenders, and check out various ratings from organizations like the National Real Estate Investor Association. A good, long term reputation is hard to fake.
Speed and ease of use
The main need for hard money loans is speed and ease of use. If a lender does not have a simple, easy process for approval and is making you do a dance for requirements, then they are most likely not good for your needs.
Affordability
You should shop around. The drawback to hard money loans are their high interest rates, which are usually between 8 and 15 percent. In addition to this, be aware of excessive origination points (fees for processing the loan) and other hidden charges.
Renovation costs
Be aware that some money lenders segment out loan amounts destined for renovation costs and disburse them in a series of draws. After the work on a particular portion of the renovation has been completed, the lender will reimburse you for the draw after inspection. A good lender will work with you on a draw schedule that ensures that the work gets done responsibly.
Learning more
L3 Funding has years of experience in the world of hard money lenders. We’ll be happy to answer your questions about hard money loans for various purposes: flip and fix, commercial real estate, or rental properties. Contact us—we’d love to help you out and answer your questions!