August 4th, 2016 3:50 PM by Gregg Mower
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.