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Hard Money Loans

Hard money loans are short term, business-purpose loans with very lax guidelines and higher interest rates.  These generally cannot be offered by traditional lenders, and are sourced from private entities or investors directly.  In addition to much less restrictive requirements, hard money financing can close in a matter of days or a few weeks, as opposed to the month or more that passes before traditional mortgage financing can close and fund.  This makes the hard money loan ideal in situations where quick closings are critical.  Most importantly, hard money can finance distressed properties that a traditional lender would never touch.  Consequently, hard money financing has funded innumerable fix and flip or fix and hold investment strategies.  Let's further explore this program's utility.

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Hard money loans easily present the most flexible range of loan programs within the realm of real estate financing.  As commercial loans that have terms dictated solely by those who are offering them, requirements to suit a variety of needs can be found in the hard money lending space.  The "hard" in hard money is a reference to the use of the property being financed as real, tangible collateral.

Let's take a closer look at this program:

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  • Very Fast Turn Times

  • Usually Stated Income Only

  • Interest-Only to Maximize Cash Flow

  • As Low as 10% Down Through HP Partners

  • Can Purchase Properties in Disrepair Unlike Traditional Financing

  • No Seasoning Requirement On Cash Out Refinance After Purchase

 

Hard money will always carry higher interest rates than traditional mortgage loans.  This should not be a huge surprise, considering the risk to the lender that accompanies the dramatically-increased flexibility of borrower requirements.  Yet, hard money is utilized by countless investors for its speed, flexibility, and generous consideration of distressed properties.

Hard Money

Minimum FICO Score: Varies
Available Loan Terms: Varies
Minimum Down Payment: Varies, 10% Minimum
Maximum Rate/Term Refinance LTV: Varies
Maximum Cash Out Refinance LTV: Varies
Time From Bankruptcy: Varies
Time From Foreclosure/Short Sale: Varies
Mortgage Insurance (Y/N): Usually None
Eligible Use: Investment Only, Rare Exceptions
Eligible Properties: Varies, Not Just Residential 1-4 Unit
(Condos & Townhomes Eligible, Including Non-Warrantable)

Hard money is a commercial loan offered from private sources, typically directly by individual investors seeking to put their money into higher-yield investments, or private companies that match such investors with borrowers.  Hard money lies far outside the constraints of conforming or qualifying mortgage loans, leaving almost complete freedom to the lender or investor when it comes to dictating requirements.

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Hard money lenders tend to place far more emphasis on the suitability of the subject property as collateral rather than your qualifications as a borrower.  Indeed, should the property be attractive enough whether before or after repair, and the LTV ratio fall in line with their specifications, lenders or investors may not care if you default.  The ability to seize the subject property as collateral protects the investor, much like a lender is protected in a traditional mortgage loan.

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While most hard money lenders look for protection by only offering financing with low LTVs, likely requiring you to bring a down payment of 25% or more (or in the case of refinance, having equity equivalent to 25% or greater), we work with several hard money lenders that make exceptions to these rules.  These partners can offer as low as 10%-15% down for purchases, or refinances up to an equivalent LTV, depending on your experience level as an investor.  If you are completely new to investing in real estate, you may be expected to remain at a lower LTV.

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Hard money financing has become an integral tool in fix and flip investments.  Hard money lenders, unlike traditional lenders, will finance the purchases of distressed properties.  When positioned in the right area, or just purchased at great enough of a discount, even a property in disrepair can yield significant profits after repair is completed.  Let's say you locate a distressed property and believe that various aspects, whether its location or the price you believe you can negotiate, makes it an attractive investment opportunity.  However, its condition would bar you from utilizing conventional or government financing in any way. Hard money may be an effective solution.

 

    Hard money is interest-only (though nothing is stopping you from making larger payments to go towards principal), and is a short-term loan typically ranging from months to a few years in duration.  Therefore, it is very important to ensure that you have an exit strategy carefully planned before committing to hard money financing. 

 

The most common exit strategies are either the sale of the home for a solid profit, or refinancing the hard money loan into a traditional long-term mortgage once the property is fully repaired and passes appraisal.  You will want to make sure that the property's After Repair Value (ARV) will be high enough compared to the acquisition cost to cover not only the hard money loan, but the costs of your repairs as well. 

 

A common rule to operate within is to ensure that your purchase price does not exceed 70% of the property's realistic ARV, with the expected cost of all renovations and repairs subtracted from that value to be even more careful.  For example, if a property's ARV will realistically stand at $100,000 after careful comparisons to similar homes that have recently sold in the same area, and your total renovation costs for labor and materials amounts to $20,000, you should purchase the property for no more than $50,000.

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If hard money financing will aid your real estate investment strategies, please reach out to us for a free consultation.

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Getting Prepped for Approval

Documentation requirements for hard money loans are much more relaxed than many mortgage loans.  The absence of any traditional lending documentation requirements is an incredible opportunity for many investors with unorthodox income sources or financial situations.  


However, hard money lenders will place emphasis on your level of experience as an investor as well as the LTV ratio.  New investors can still obtain financing.  To see what documentation you may need for your hard money loan, check out our prior to approval checklist page.

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