Hard money the easy Way

Since the sub prime situation hit critical mass there has been a lot of interest in hard money loans. In this article I hope to clear up some of the hype surrounding hard money. Also to offer anyone looking for hard money a practical guide to seeking hard money funding.

Here are the 5+/-2 things you should know about hard money.

1. What Hard money is.
2. The Hard part of hard money
3. The Best Uses for Hard money

I’ve never been big on intros so let’s get into it.

1. What Hard money is.

Of course the first thing we want to do is define hard money. It seems this product has become hot in today’s market yet a lot of people are still unsure as to exactly what hard money is. I define hard money as non conventional or private financing with private funds.

Since hard money loans are not backed by government safeguards, the guidelines are less stringent and the documentation required is minimal. This means that they are easier to qualify for.

The credit scores you need to qualify for hard money loans is lower then you will need from a conventional lender and in some cases you need not to worry about your credit because most hard money lenders have no minimum credit guidelines.

You may hear the term bridge loan being used in place of the term hard money which is okay it describes one of the main purposes of hard money a short term loan to quickly get from point A to point B. IE to get from acquisition to a point where maybe you can secure some long term financing.

To sum it up the main things to remember about hard money is quick closings, lower credit guidelines and minimum documentation.

Hard money is not conventional financing (I told you that in section earlier). You should never use hard money where you need long term financing, because over the long run, the rate on a hard money loan will kill you (more on hard money rates later).

And as far as terms go most hard money lenders have no long term products

2. The hard part of hard money.

In this section I want to talk about the drawbacks of a hard money loan. Now when I say drawbacks it’s not saying that hard money loans are any worst then conventional financing, but it would be unfair to talk about hard money and offer all praise and no criticism.

Quick closings, lower credit guidelines, minimum documentation needed, your saying to your self what more could I want from a loan and how can they call a loan like that hard.

Well once you know the answer to that question you will know whether you can stomach a hard money loan.

The first hard part of hard money is the fees. Whether you go to a lender or broker expect to pay anywhere between 2 points and as many as 10 points in fees for a hard money loan. (I’ve heard rumors of being charged even more)

If you are extremely rate sensitive or even mildly rate sensitive then a hard money loan is definitely not the way to go for you. You can expect a rate in the range of 9% and as high as 24% depending on the lender and the terms. (I’ve heard rumors of lenders charging higher rates). Usually the shorter the term or the more complex the loan the higher the rate.

I know you are thinking where are the feds to shut down the loan sharks? But since this is private money not institutional, not federally regulated this is all fair. In this case it is their money, their rules their rates.

You can not borrow 100% of the value of the property. Now this is a thing most people get confused about. Some conventional lenders still offer 100% loans but since the sub prime situation, hope your credit score is off the charts and you have a lot of money in reserve, because qualifying for one of those now is almost is almost impossible.

If you do not qualify for the 100% loan a traditional lender will only loan you a portion of the purchase price, even if there is equity in the property they will want you to put money toward the purchase. So for instance if you qualify for 80% and the purchase price of the property is $80,000 even if the property is worth $100,000 (which would leave 20% equity in the property) the bank would cap you out at $64,000 (80% of $80,000). In order to get the $80,000 from the bank you would need to contract for $100,000, but you will still need $20,000.

Most hard money lenders will give you 100% of the purchase price but not 100% of the value of the property. Most hard money lenders have a ceiling of 70%-75% (of course I have heard rumors of hard money lenders going higher) of the current value of the property or of the A.R.V. (after repair value, more on that in the next section) they want you to leave equity in the property. This is their protection in case of default, a property they can possibly sell quickly because of the equity. This is the main reason behind the relaxed guide lines. The trick is to buy below market value, hard money lenders like good deals.

Now these may seem like drawbacks but in the right situation the benefits of hard money usually outweigh the drawbacks. This brings us to the next section.

3. The best uses for hard money

Hard money is not for every situation, here are some ideal hard money situations.

You need to move on a deal and close fast. Conventional financing with the rate rollercoaster, paper work requirements, underwriting guide lines, etc. can sometimes take a little while longer then you have to close (anywhere from 30 days to never). If you have a deal you need to move on quick you can use hard money and close in as little as 2 days.

You want to purchase multiple properties over time. A traditional lender will want you to complete the entire process for each loan, some hard money lenders once they are familiar with you, and of course you have a good payment history, will not even need you to submit applications for future loans.

You have a property that needs rehab or renovation. Hard money and rehab properties (fix and flips) go hand in hand. This is one of the best scenarios for hard money.

Most conventional lenders will only lend on properties in move in condition, and if the property does need renovation or repairs that is on you. And like I said before you must qualify for 100% financing if you want to get more then a portion of the acquisition costs. So if you are investing in properties to flip or wholesale, and they need repairs or renovations before they are in move in condition then you need hard money.

Hard money lenders will lend on the current value or ARV (the value of the property after repairs and renovations.) And you can include renovation costs in the loan amount as long as the total costs don’t exceed the limit. Most lend up to 70%-75% (and of course I’ve heard rumors of some lending even more). So for instance say you have a property under contract for $50,000 and it needs $20,000 in rehab, to get it into move in condition and has an ARV of $100,000. You can go to a hard money lender and get a loan of $70,000 ($50,000 + $20,000) or 70% of the ARV, which is 100% of the acquisition costs meaning you have just completed no money down deal. (And I bet you didn’t think that was possible nowadays)

You have different types of property. Most conventional lenders lend on either commercial or residential, if you find the right hard money lender, you can finance most property types with one lender.

You have a well defined exit strategy. This is the key, make sure you have a well defined exit strategy, sell, refinance etc. Because as I said before hard money loans do not have long terms but they do have high rates. So make sure you have a well defined well timed exit strategy.

Hard money can be easy, once you know what it is and how to use it. Hope this has helped make hard money a little easier for anyone looking for info on hard money.