From what I understand, when Hard Money is used, it is usually used for flip deals. How would Hard Money work with rentals? If I find a great deal and I want to buy and hold, how would I go about using a HML? Please explain.
Thank you,
Yia
If you are wanting to buy-and-hold rental properties, then you would use a HML to purchase the property, get the rehab done and find tenants, and then refinance out of the the HM loan into a normal mortgage.
Thank you for responding. What would happen if at the end of HML terms and one can’t refinance?
Thanks,
Yia
Your HML could decide to foreclose if you have not repaid the loan buy the balloon maturity date. Always be sure you have a clear and viable exit strategy from your Hard Money loan
DHLC is absolutely correct, the lender could decide to foreclose on you! Another option is that you can write in a “deed in lieu of foreclosure” clause which means that if you default on the loan you basically give the keys to the property back to the lender and avoid foreclosure. Lastly, you could appeal to the lender to give you more time, especially if, for example, you’re in the middle of a refi and your new lender is taking longer than expected. This has happened to me before and I just showed the HML that things were in fact moving along, and they gave me an extra month to finish out the refi.
Thanks guys, it’s good to know there are plenty of financing options out there.
Yia
Omico, here is a quick run down about Hard Money Loans (Residential or Commercial).
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HML are asset based more so than credit based
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Designed for short term lending (6 mo to 2 years)
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Still require borrower to have cash investment into the property
There are a lot of misconceptions about HML’s because of brokers who either do not understand them or because of the lack of truthful information in the terms found in HM Lender’s marketing materials.
The vast majority of HML are not based on the full market value or improved values (except rehab loans for flipping) rather they are valued on a quick disposal value of the property should you default on the loan. This means in actuality a Lender’s 65% or 75% LTV offer is more like 50% of market value and they also deduct if the property is in poor condition.
Another fact that is overlooked is that most HML require a borrower to have 30% to 50% of the purchase cost in cash. Now there are some exceptions, but even if they offer 100% of purchase cost you must still cover all closing costs … and HML deduct their fees, broker fees and any required interest reserves from the gross loan amount which essentially means you will still have to come up with money down because the loan amount will be short of what you need.
HML are great if you need to purchase a property quickly and can not wait for a conventional lender to close on it (approximate difference is 15 business days vs. 45 business days). But if you plan to retain the property you should apply for conventional financing at the same time so that you can pay off the HML quickly. Fortunately most HM Lenders do not charge prepayment penalties because they want you to pay them off quickly so they can lend to someone else.
The way most HM Lenders make their money is actual in the Points and Fees they charge rather than the interest you pay. Compared to conventional loans you are usually going to see points ranging from 5% to 15%, additional lender fees can equate to an extra 1% to 3% of the loan amount on top of interest charged at 10% to 18%.
So unless the property you are looking to purchase is an absolutely great buy and is going to sell fast … I recommend that you do the math before you consider a HML. Keep in mind also that many HM Lenders charge some of their fees upfront with no guarantees or assurances that you will be approved … so another thing to consider.
I’ve been self-employed for less than 2 years. Would I have a problem getting a HML refinanced if I’ve been self-emplloyed for less than 2 years if I have an income producing property?