You may or may not have heard of the term “Hard Money Loans or Private Money Loans” before simply because you may never had a need for one. But what exactly are these loans and what are they used for? Well simply put they are used primarily to buy or refinance investment property and the loan comes from a private party or a group of private individuals. It might sound complicated but as you will soon find out is actually pretty easy. So why would someone lend a large sum of money to someone they don’t even know? The answer lies in the Real Estate the loan is placed on, as Hard Money lenders will require a large equity position before they lend. So why would I take a loan out with such a high interest rate and fees in a market where interest rates have never been lower? This answer lies in the lack of documentation that is reuqired and the speed at which it can be done.
So we have asked some very important questions about Hard Money loans. We asked what Hard Money Loans are used for, and we know they are used to purchase or refinance investment property and are provided by private parties. With the new laws within the Real Estate Settlement and Procedures Act or RESPA it has become illegal to lend money on a primary residence without fully income qualifying for the loan, but the same does not hold true for investment properties.. The loans on owner occupied properties must also follow strict disclosure guidelines and timeframes where this does not apply either to invesment properties. Hard Money Lenders are private individuals that see a benefit in lending their money at higher interest rates than the banks can offer in their savings accounts. So investors in Hard Money Notes do not wish to take on the new liability that comes with the Dodd-Frank lending laws and regulations, that come with owner occupied investments, so they will only lend on those properties that fall outside of these laws and will lend on investment propertyies only. As we have already said, we are in an environment where interest rates are at historic lows and that goes the same with saving accounts, so those folks that have a high net worth would rather act as their own bank and lend their money out at high interest rates then letting bank lend their money out at low interest rates. The Hard Money Lenders are also limited on what they can do on their own without the use of a Mortgage Broker to arrange the loans for them, and that is where MAE Capital Mortgage comes in. Our job as a Mortgage Broker, dealing with Hard Money loans is to put the borrower and the lender together with terms that are appealing to both the borrower and the lender. The people that need money to fix and flip homes will use Hard Money as it is quick and they don’t have to go through the banks strict qualifying procedures. Our Hard Money lenders will look at the equity position in the property first before they will lend money, as a bank will look at that and thier income and credit as well. Generally, Hard Money lenders will require a minimum of an 75% LTV but most of the time will require a 50% to a 70% nequity position, depending on the type of property they are asked to lend on. The higher the risk the property poses to the lender, the more equity a borrower will be required to have to get a Hard Money loan. An example would be land verse a single family home. Land is far tougher to sell if there were to be a default as opposed to a single family home, thus the equity required for a land loan will be higher than that would be required for a single family home.
The Property itself is the collateral for the loan so a Hard Money Lender will be more apt to lend money to a property that has a high equity position. This is exactly why someone would lend to someone they don’t know. As a Mortgage Broker it is our job to do the investigation on the property for the investors we represent, then it will be up the investor to decide whether or not they wish to lend on any particular property. Some ways we can make it more enticing to an investor to lend their money out would be the return they can get on their money verse other investments. The return is the interest rate for the lender. The higher the interest rate that the lender can get the more apt they are to lend their money. That is why interest rates are significantly higher for Hard Money loans than traditional financing. So If you are looking to borrow money and you have less than perfect credit, a bankruptcy, foreclosure, or can’t verify your income, and want to buy an investment property and have a large down payment then a Hard Money loan might be exactly what you are looking for, but be prepared to pay for it.
Again the risk drives the interest rates on Hard Money loans. The higher the risk the higher the interest rate and fees. On the other side of the Hard Money Loan is the investor. As a Mortgage Broker we have to find those investor sources of funding for those folks that have all different kinds of needs and different prperty types. It is our job to find sources of funding for 1-4 family homes, Construction, Commercial, Commercial, Raw land, Apartment loans, and loans that may blanket several properties, etc.. It is Our job here at MAE Capital Mortgage to know where to take potential borrowers and match them up to investors that would be interested in lending on these types of properties. Again the property is what secures the loan in the unforeseen possibility there should be a foreclosure. You see, if the borrower cannot make the payments, the lender will foreclose on the property that was put up for collateral. When a lender has to foreclose there are costs associated with the process and that is why the equity in the property is so important for a Hard Money Lender. In California, it will take 6 months to a year to foreclose so the time the property sits without any income being derived from it is also a cost to the lender, hence that risk factors we talked about earlier and the requirement for a high equity position.
As a potential borrower of Hard Money you should be prepared to show either a large down payment when purchasing a property or a large equity position when refinancing one. Remember, these loans are not arranged on property that is primarily used as your primary residence, as Lenders do not wish to comply with the Government’s Dodd-Frank laws. So investment property only for Hard Money Loans. There has been a few times borrowers try to tell us, here at MAE Capital Mortgage, that they are not living in the property they wish to obtain a Hard Money Loan on when they actually live in it. This is done as they don't qualify for a traditional loan for a owner occupied home for one reason or another. This is actually Loan Fraud on the Borrower's behalf. By signing to the effect that you do not live in a property and you actually do is considered loan fraud and you can be prosecuted for committing loan fraud, so don’t try this. Private Money or Hard Money Loans have their purpose in Real Estate financing today as they keep the flow of investment and renovated properties moving through the market place as well as filling the gaps where banks won’t lend. For the owner occupied Alternative Income Qualifying programs click here and we might have program that can help owner occupants or poetential owner occupants.. We would love the opportunity to go over all your Hard Money needs. Call us at 916-6782-6130 or if you have any further questions we have you can go directly to a Hard Money pages and use the online forms and information provided and upload your scenarios.
Self-Directing your investments either from your IRA or your savings in Notes and Deeds of Trusts is a little known activity that can dramatically increase your returns on your investments. Most folks just listen to their Stock Broker when it comes to their IRA or retirement funds as to the investment they should be in according to their age. This has traditionally been a good practice, but have you really studied your investment statements to see how much of your money is being spent on this service? That’s right your retirement funds are being skimmed off for brokerage fees and management fees and those fees add up. Those fees come directly out of your funds and you have no control over it. Did you know that you, by law, have the ability to self-direct your IRA? The fact is that you can choose the investments like Real Estate and Notes and Deeds to hold in your IRA account. You may have heard about this and asked your Stock Broker about this and they discouraged you from doing this as you would need a custodian to take care of the accounting and most stock brokers do not undertake this as they don’t get paid to do so. A Stock Broker makes money every time you invest in a stock either buying or selling, they also can charge a management fee. A Stock Broker will not be able to collect those fees if you are self-directing your funds into Real Estate or Notes so they will tend to discourage you from taking control of your funds as they will lose out on money.
*Self-Directing your IRA or Retirement funds has to be done with the use of custodian that can do the accounting for you. If you look at the costs you will find them significantly less than brokerage fees. If you have followed Real Estate and the laws that have changed over the last several years you will see that the laws have opened up and area within the Real Estate Lending industry for private investors. With tightening of credit in the primary lending markets such as owner occupied loans and Conventional, FHA, VA, and Jumbo loans you will see that there is a need for loans to investors to flip homes, commercial loans, land loans, and construction loans. These loans come with a higher perceived risk, thus they have higher interest rates which equates to higher returns to those who lend in this arena (generally 8-12%). With the perceived risk being higher to the borrower the actual risk to the investor is really quite low done properly. This is done by restricting the lending to a lower loan–to-value (LTV). What a low LTV does is twofold; one it makes a borrower put down a large down payment or have significant equity in a property and that will generally insure that they will not want to default and lose the property and do everything in their power pay monthly; and two the investor who is invested in the Note holds the property as security for the loan so if the borrower defaults the investor gets to sell the property and they get their money back and sometimes can finish the project and make a large return on the equity in the property. If you are using your IRA funds all returns are non-taxable until you use them at retirement time which means you can grow your money even faster by using un- taxed dollars to churn you investments. By acting as a lender with your own funds you will act like a bank and you will be privy to the high returns, but how do you get started in investing in Notes and Deeds or Real Estate?
Here at MAE Capital Real Estate and Loan we can help you with picking the right custodian to use as we have used them for our own funds. As a Broker we can help you with your interments either into Notes and Deeds or Real Estate directly. We work directly with the custodian so your funds are directed property and will keep you legal. The law states you can lend your money to others for Real Estate up to 8 times a year without the services of a Licensed Broker. However most would choose to use the services of a Broker as they will be more protected by using a Broker, as the Broker must adhere to a strict set of rules when handling other people’s money. The system is easy with no costs to the lender to use a broker and the yields are far greater than that of a Bank.
What you need to know when deciding to invest in Notes and Deeds? First is the terminology, there are many new words that you should get comfortable with. The first of which is what is a Note and a Deed of Trust. The Note, or Promissory Note, is the written paper or contract between the Lender and a Borrower stating the terms of the loan and how it will be paid back. The Deed of Trust, in California, assigns a trustee, or a Third party to be in charge of foreclosure proceedings and as is the document that is recorded at the county that secures the Note legally. Sounds like a mouthful, but to keep it simple the Deed of Trust secures the Note and are the legal instruments that bind the Borrower and lender together until the loan is paid in full. A Real Estate Broker like MAE Capital Mortgage can prepare these documents and make sure they are legal binding instruments and that they are handled correctly.
The next thing you need to know is how the system works. The system is generally pretty easy. Once you have decided to invest some of your money, you need to know who to give your money to and how it will be handled. The very first thing I would suggest is that you do not give your money directly to a Broker and ask them to invest it. This is very important, as you should be advised of the investment you are making before giving any money. At MAE Capital Real Estate and Loan we furnish you with the RE 35 (Investor Booklet) and RE 870 (Investor Questionnaire), to determine your financial situation as an investor. Then when MAE Capital presents you with an investment opportunity we provide you the RE 851 (Individual loan information form) that spells out the qualifications of the Borrower and the terms of the transaction. At MAE Capital Real estate and Loan we provide you with the loan application, appraisal, and preliminary title report, and credit report and the purpose of the loan. The risks of the transaction are outlined and detailed so you can make the decision to invest or not, such as the Loan-to-value, credit, ability to repay, and exit strategy. Generally, the higher the risk to the Lender the higher rate of return the Lender will have. Conversely, the lower the risk the lower the return, and as an investor your risk assessment will become obvious. So once you have determined that this is an investment for you, and the terms of the transaction are acceptable for your return objectives, we will draw up the legal documents for you and the borrower to sign. At MAE Capital Real Estate and Loan we will insist on using an Escrow company that will issue title insurance, to protect you, as well as act as a disinterested third party that will bring Buyer, Seller, and Lender together in a neutral setting at different times. Once the buyer has signed all the legal documents you, as the Lender, will be instructed by us, the Broker, to wire funds directly to the Escrow Company, as your Broker we do not have direct contact with your money. Before we allow you to fund the transaction we have made sure the Title Insurance is correct, and that there is a hazard insurance policy in place in case of a catastrophe. Before the loan has funded we have set up the servicing of the loan for you. Servicing the loan means the collection of payments and the dealing with the borrower throughout the term of the loan. There will generally be a nominal fee to do so in addition to a “servicing spread” that is built in the loan paid by the borrower. For example; a servicing spread is the difference between the interest rate collected from the borrower and the rate of interest paid to the Investor/Lender. If the Note was written at 11% and the Lender (you) was promised to receive 10% the 1% difference is the servicing spread paid to broker every month.
The Self-Direct IRA can also be used to buy and hold Real Estate as well. So if you are into investing into rental property and receiving rent every month as return on investment you can do this as well. The returns would be deposited to your custodial account every month tax free. You could also buy and sell real estate in your IRA. So if you already have a rental in your IRA you can sell it and invest into another piece or pieces of property all tax free. At MAE Capital Real Estate Loan we can show you how this is done for you and help you set up your custodial account to manage it.
I sincerely hope this has helped you with information to make decision on. We at MAE Capital Real Estate and Loan are here to help with your Self-Directing funding needs. If you would like more information or to talk with a Broker to go over your needs please click here and complete the quick information or give us a call at 916-672-6130.