How does hard money work?

I own a couple of properties that I purchased in June and July of this year. The idea was to rehab and sell, but I ran into some snags with permitting. The problems have been solved, but I’m now over a month past my goal to have these properties sold!

I have about 60k in equity in the houses (in as-is condition, obviously more once work is completed). I have the investors to fund the projects themselves.

What I need is to access some of the equity in one of these properties to fund the start up costs for a new branch of the real estate company I work with. I’ve been told by conventional financiers that I need to look in to “hard money,” which I’ve heard of but never utilized before.

Can anyone give me any pointers on where to look and what to look out for?

I appreciate your help.

Are the properties owned free and clear? If so, then a HML can loan you funds for the rehab based upon the after repaired value.

If the property is in an average condition right now, then a conventional lender can do a cash out refinance for you as well.

It would be best to provide additional information about your credit, income, assets, etc.

Well you could start by lerning how they operate, the terms they have, the interest rates, if they have any pre-payment penalties(some do, some dont)-I guess what I’m trying to say is do research throughly.

Here’s some basic cost info

Interest rates: 12 to 18 percent
Balloon payment: typical, usually due after 1 or 2 years
Loan position: must be a first mortgage, not second
Maximum loan-to-value ratio: anywhere from 50 percent on up to 70 percent
Points: 4 to 8

Assuming the worst rate and point structure possible, a $100,000 loan could cost as much $8,000 up front and $1,507+ a month in principal and interest payments.

If you have an above 560 credit score you may qualify for a rehab loan or refinance with a traditional bank.

Hard Money Loans vs. Conventional Loans

There are a lot of misconceptions regarding Hard Money Loans and Hard Money Lenders (HMLs). Most of the confusion surrounds the differences between conventional mortgages and HMLs. I wanted to take a moment and try to answer many of the general Frequently Asked Questions as well as to compare a HML to a Conventional non-owner occupied investor loan.
Frequently Asked HML Questions

How does the program work?
HMLs provide Real Estate Investors access to asset based capital. We can fund quickly, typically within 72 hours of receiving the final docs from the Title Company. Hard Money is available for adequately collateralized loans on single-family residential houses and other Real Property including commercial projects.

What is the interest rate?
The interest rate depends upon the Lender. The rate will range from 14% interest only to 18% interest only annual interest rate payable monthly in most cases.

What Loan-to-Value are HMLs looking for?
Typically a loan does not exceed 70% of the after-repaired-value (ARV).

How long is the loan for?
HMLs typically write the notes from 6 months to 12 months depending on the Lender and your needs.

What are the costs?
Costs vary depending on which Lender you use. All loans will require at-least a Title Policy, Vacant Dwelling Insurance, Inspection, “As-Is” Appraisal & Flood Certificate. Most require origination points.

Can I get repair money?
Yes. HMLs can fund repairs. HMLs require a “Draw Request” form to be filled out to identify the completed repairs to the property, Copies of the invoices from the vendors. Then, we will pay you once the work is inspected-HMLs do not pay in advance for any work.

Does my credit matter?
Yes and no. For the most part, HMLs look at the value of the property after it is repaired, how much you are paying for it, and how much the repairs will cost to determine how much we will lend. In some cases, with your consent some HMLs may need to checkout your credit history.

How do you decide how much to loan?
Typical loans range from $25,000 to $1,000,000: All loans are considered on a case-by-case basis. Each HML has their own criteria.

Do HMLs need an appraisal?
Yes, HMLs require “as-is” and “as-repaired appraisals”.

Do HMLs require inspections?
Yes, HMLs require inspections including the interior before funding and before a repair draw to ensure the work is completed in a satisfactory manner.

Do I need to put any money down?
In most cases, Yes. Most HMLs want to ensure that you have enough resources to finish the repairs and cover the costs of the loan plus any surprises. Therefore most HMLs require that origination/discount points and other required items be paid at or before closing. We are confident that if you cannot afford to close you typically cannot afford to take out this type of loan.

How much will my payments be?
To figure your monthly payment simply, multiply the rate by the loan amount and divide that number by 12.

Will HMLs finance commercial properties?
Yes, many HMLs will on a case-by-case basis finance commercial properties and then only if the loan is secured by improved real property such as the building and land.

Will HMLs finance apartment buildings?
Yes, many HMLs finance apartment buildings however understand that it will take us longer to get our due diligence done.

Do HMLs allow interest to be deferred to the end of the loan?
Some HMLs do. Most however have interest payable monthly. Again, we are confident that if you cannot afford to make monthly interest payments you typically cannot afford to take out this type of loan.

How do HMLs compare to a traditional non-owner occupied investor loan?
You might be surprised how competitive HMLs really are.

Final Analysis

In many cases an HML can be obtained faster and easier then a conventional loan and while in almost all cases the amount you can borrow from a HML exceeds the amount you can qualify for from a convention lender the cost difference is minimal. HMLs are not for everyone and every HML has a different program and qualification process. However if you need fast access to capital for REI then a HML may be your new best friend.

Good luck and may all your investments be profitable!