There are a lot of property flips in America. In 2016, there were over 300,000 fix-and-flips, amounting to a $56 billion market. Whether a buyer is looking to purchase a fixer-upper or a newly renovated home, homeownership rates are high, at a rate of almost 65%. When buying a home, many Americans turn to traditional bank loans. Conventional bank loans can be more difficult than hard loans.
Traditional bank loans have strict requirements, while hard money loan requirements don’t require as much.
Why would you choose a hard money loan instead of a traditional one? What are the requirements for a hard money loan? Continue reading to learn more about how to obtain a hard cash loan and the requirements and rates.
What is a Hard Money Loan?
A hard money loan, also known as a short-term bridge loan or a short-term loan, is a loan secured by real estate. Hard money lenders are individuals or private companies, not banks.
Although they were once considered the last resort option, hard cash loans are now very popular and you can find great deals if your options are explored.
A property is often used as collateral for hard money loans. Traditional banks base their decisions on:
- The creditworthiness and ability to repay the loan
- The borrower’s financial history
- The ability of the borrower to repay
Traditional bank loans can be difficult to obtain because the lender needs to thoroughly investigate each applicant and review their credit history.
Hard money loans tend to be more concerned about collateral. Lenders can take the collateral if a borrower defaults on payments.
What is the average time it takes to get a hard money loan?
Many times, hard money loans are approved quickly and funds within days.
Hard money loans can be for 1 to 3 years. If you are looking to repay the loan quickly, hard money loans typically have higher interest rates.
Lots of property flippers use hard money loans because they plan to renovate and sell the real estate within a year, and they use that real estate as financing for the loan.
The high cost of a loan such as this is offset by the fact the borrower intends to repay the loan quickly.
Who should use a hard money loan?
Borrowers choose to take out hard money loans because they can get the loan funded quickly. The money can be funded in as little as one week for most hard money loans. Traditional bank loans typically take between 30 and 45 days.
Quick closing with a hard-money loan can be a great way to attract a seller if you are a real estate investor looking to purchase a property that has many competing offers.
People who have had multiple rejections from banks for conventional loans may be able to apply for a hard money loan. A person’s ability to obtain a traditional bank loan can be affected by factors such as foreclosures, credit problems, income history, and short sales.
Bank lenders can deny applicants even if they fall into a higher income category.
These issues are not important to hard money lenders, provided the borrower has sufficient equity in the property.
For situations such as:
- Lenders for land
- Construction loans
- Fix and flip
- Buyers with credit problems
- Investors need to act quickly
Hard loans are the best option when traditional banks are not an option and borrowers need cash quickly.
How to get a hard money loan
Lender requirements for hard money loans vary depending on the lender. There is more scope for negotiation because hard money loans are often obtained from individuals or companies.
There are three main requirements for hard money loans.
A hard money loan can only be obtained if you have the down payment or equity required in the property that will serve as collateral.
For residential properties, the minimum amount is usually between 25% and 30%, and 30% to 40 for commercial properties.
Sometimes, a lender may allow a borrower multiple properties in order to obtain a single loan. The term for this is “cross-collateralizing.”
Borrowers with more equity or significant down payments have a greater chance of getting approved. Lenders are less likely to approve borrowers who have invested more in the property.
Financial strength overall
A common requirement for hard money loans is that the borrower has sufficient cash reserves to cover any monthly loan payments and holding costs. HOA fees, taxes, and insurance can all be considered holding costs.
A borrower’s cash reserves will determine how likely they are to be approved for a hard-money loan.
A borrower without sufficient cash reserves will often have difficulty getting a loan. There are cases when a lender will increase the loan amount and keep some of the borrower’s funds aside to pay for insurance and taxes.
In this case, the borrower will still get their loan but the lender will make sure that monthly payments are not neglected.
Real Estate Experience
Hard money lenders are interested in seeing the borrower’s experiences in the real estate market.
Borrowers trying to finance their first fixer-upper may have a harder time getting hard money loans than real estate veterans.
The lender may ask the borrower for details about the project and an exit strategy if they have no experience. They will want to know how the borrower intends to repay the loan.
Hard Money Loan Rates
Although the best hard money lenders offer competitive loan rates, it is possible to get scammed if they are too good to be true. Be sure to only sign a contract with a trusted lender before you sign the dotted line.
Interest rates can vary depending on the lender and the risk they perceive. They typically range between 10% and 15%.
The points can be anywhere from 2% to 4 percent of the total amount borrowed. The fees charged by the lender to provide a hard money loan include points. A percentage point is equal to one point.
How to find the right lender
With a little research, asking around, and reading reviews, it’s not difficult to find the right hard money lender. Even if you are in a hurry, ask questions to find the right lender for your needs.
These are questions you should ask potential hard-money lenders:
- Are you the broker or the actual lender?
- What project details/documents are required to submit a quote?
- Are you a credit shopper?
- What type of credit score do you want?
- What is the average time it takes to receive a quote?
- Where Is your money coming from?
- What happens if my loan is due to be extended?
- What is your approach to interest? How do you handle interest? Is it at the end of the loan term, upfront, or monthly?
- How long have you been lending?