HARD money?

Financing, Hard Money Lenders, Private Money
1

Please explain hard money.

2

Hard Money Loan - A loan that is underwritten with the condition and value of the property as the primary criteria for approval. Secondary issues may include the credit of the borrower, the ability of the borrower to repay the loan and/or the ability of the borrower to manage the property or successfully complete a rehab and sell the property. Owner occupancy, debt ratios and other issues are seldom a factor. Appraisals rather than purchase prices are used to determine value. Cash out purchases are often allowed and are another key benefit. These loans are usually approved within days and are often funded in two weeks or under with times as short as two or three days not uncommon. The cost for the benefits of speed of funding, lax underwriting and other advantages is typically a moderately high interest rate (usually low to mid teens) and high points (usually 5 to 10). (See definition of “underwriting” below.)

[b]This and other term definitions can be found in the Investing Glossary on this site: http://www.reiclub.com/real-estate-terms.php[/b]

3

So what is better to use? Hard money or your credit? Is there a preference?

4

A lot would depend on interest rate, holding period, etc., but generally hard money is better then credit card financing because:

  • HML won’t effect your DTI (HM loans aren’t reported to the bureaus—once you exceed 35% of your max. credit limit, your DTI and FICOs will be adversely effected)
  • HML won’t effect your FICO (same reason as above)
  • Some HMLs allow you to roll in the cost of purchase + repair + closing costs + monthly payments—you won’t be afforded this luxury when combining a conventional loan + CC rehab financing.
  • Some HMLs don’t concern themselves with FICO scores/DTI ratios—credit card companies do…
  • CC operate on a compound interest basis, HMLs don’t.

Regards,

Scott Miller

5

Unless the loan has been made to a business entity, I dont think this is correct. Could be wrong though. Most lenders require the 1003 (application) to accurately report all 1-4 unit properties. Financing for these properties must show up on the 1003 as well. As a mortgage professional, when we work with a client, we should be collecting as much info as possible to help the lender make a quality decision. Knowing that there are hard money loans and not reporting those could be considered fraudulent. I believe these would affect the debt to income ratio so the lender should know about them.

Great thing about many hard money lenders is that they wrap payments up into the loan in which case a new lender may not need to count the paymeent against the borrower.

6

I bet an HML will affect your DTI and/or FICO due to a negative credit report, or judgement, if you default on it. That’s a stinker…it only affects you if you mess up, not if you do well on the deal. :biggrin

7

What’s stopping an HML from calculating interest on a compounded basis, vs a simple basis?

8

Ben,

HM loans are not reported to the bureaus unless they are defaulted on—this is practiced by the majority of the industry and I suggest you consult with the investors you work with for further guidance.

I’m surprised you weren’t aware of this.

Regards,

Scott Miller

9

I know very well that hard money loans are not reported to the credit bureuas. But this DOES NOT make them exempt from disclosure to other lenders who need to calculate DTI, mainly conventional loans.

So let’s make sure we’re on the same page.

  1. If a borrower is obtaining a hard money loan then I agree that there is no requirement to disclose other hard money loans already in place. (unless the lender requires this)

  2. For conventional financing, the borrower and mortgage professional must disclose all outstanding mortgage to the lender for debt to income ratio requirements as well as mortgage history. Loans made to a business entity with title vested in business are not required to be reported as this would be a commercial loan.