October 28th, 2021 2:38 PM by Gregg Mower
The first thing everyone who is considering using Private Money otherwise known as Hard Money loans to fund Real Estate is that these loans are primarily for Investment property. People ask; “why not help fund owner-occupied property with poor credit?”. The answer is that the current lending laws with regards to Qualified Mortgages have many limitations and disclosure requirements. A Qualified Mortgage is a mortgage used for owner-occupied 1-4 family homes. Usually, Qualified Mortgages are sold to FNMA or FHLMC which have stringent lending requirements. Private Money loans, on the other hand, are from private individuals, and retirement funds of those investors, and they are more interested in the equity in any piece of Real Estate than the qualifications of the borrower. The thought is, if a borrower is going to put down 30% or more of the purchase price, they are not likely to walk away from that investment, so they tend to make the payments even when the rates are high.
Private money/ Hard Money can be used to fund residential property, raw land, commercial property, Commercial land, construction, mixed-use properties, warehouses, Agricultural land, and more. Each investor or the people with the money to lend generally have an appetite for a specific type of property they feel most comfortable lending on with their money. As a Mortgage Broker, MAE Capital Mortgage has many different investors with different appetites for different types of property. It is our job to match up the investor with the borrower and make sure that both investor and borrower know what they are getting into before a deal is struck. MAE Capital Mortgage will do the legal paperwork to keep both the investor and the borrower informed as to the terms of the financing prior to funding an investor’s money.
When would you use Private/ Hard Money to purchase Real Estate? The best answer to that would be when a borrower doesn’t qualify for traditional financing. Most folks that utilize Private funds for their project generally the borrower or the property has issues that a traditional lender will not lend on. A borrower may have poor credit with a large down payment thus not qualifying him or her for traditional financing. This is where a private investor comes in. A Private investor will lend to a borrower regardless of their credit score if they feel the equity is there, in case of a foreclosure situation, however, like I said earlier people generally will not walk away from a large equity position and will find ways to make that payment so they won’t lose the property. This is good for both investor and borrower in that the borrower gets the property and is good for the investor as they get the yield on the loan without any obligation to fix a property or pay any maintenance, utilities, or taxes.
Hard Money Loans have been used for fix and flip properties and fast funding. For the fix-and-flip property buyer, it is extremely helpful to have money ready and available for fast closing so these types of Real Estate flippers usually have a good private money lender that they can draw on at any time to get the deal where others may not be able to close as fast. In addition, with a fix-and-flip loan, we have investors that will fund the costs of improvements up to 65 or 70% of the projects after repair value, which is helpful to obtain the fund to fix the property. At MAE Capital Mortgage we work with many of these types of Fix-and-Flippers to fund property fast.
The terms of Private/ Hard Money loans vary a bit, but they are generally a 1–5-year Interest Only Loan. The interest rates will vary greatly depending on the Loan to Value, property type, and borrower experience. The beginner borrower will probably be looking at interest rates between 10% and 12%. An experienced borrower or someone with good credit may be able to get rates as low as 4.99% and everything in between. The cost for private money to the borrower ranges from 2%-6% of the loan depending on the investor and the risk. These costs are generally factored in by an experienced Real Estate Investor into the profit margin for the project they are buying.
Using Private funds to fund your Real Estate project is not for everyone, but you know when you need it, and we are here to help you fund your projects. With a relationship with a Hard Money Broker over time or after a few transactions, you tend to get better pricing and lower costs when the team understands that you are a good risk. To hop all over with different Brokers you will always be on the high side of rate and fees as private money lending is relationship-driven. Here at MAE Capital Mortgage our experienced team of loan officers has the investors and the tools to get you closed when you need the funds. WE look forward to helping you whether you are a novice or experienced we can accommodate your needs. Call us today at 916-672-6130.