can someone explain how this statement makes sense:
“In many cases a hard money loan can be obtained faster and easier then a conventional loan and while in almost all cases the amount you can borrow from a hard money loan exceeds the amount you can qualify for from a convention lender the cost difference is minimal.”
there’s two points here that i can’t make sense of. first, if hard money lenders typically go up to 70%LTV, how can they ‘exceed the amount you can qualify for from a conventional lender’? I was under the impression that lenders will typically go much higher than 70%LTV.
Secondly, the cost difference is minimal? don’t most hard money lenders charge a lot of points up front? They seem to charge many more points up front, and a significantly higher interest rate. how does that translate to a ‘minimal’ difference?
was trying to read up on hard money, and that statement confused the hell out of me. thanks for any clarification
my only guess would be that the typical person needing a hard money loan have a terrible credit score. they would be lucky to get approved at all through a regular bank. i have seen interest rates as high as 12% (no joke) for a regular mortgage. the origination rates are higher for a hard money loan, but i guess if you only need the money for the short term, which is the main purpose of a hard money loan anyway, the overall difference wouldn’t be huge. especially when you consider that a hard money loan will fund within a week and save your butt.
i def realize that you can use hard money w/o good credit, adn it closes fast. however, that quote makes it seem cheaper and of a higher LTV% than conventional loans… even if a conv loan is at 12%, hard money will still likely be more. maybe closing costs are slightly different, but hard money has more points and higher interest in the vast majority of circumstances i thought.
jd- Hard money is not a long term financing option and should not be used in such a way. When I did my first deal I was 18 and without a dime. The interest rate was 19% or 1.58% per month. I was able to roll the points into the principal to be paid at the end. The deal was completed in 3 months so I wasn’t stuck paying 19%.
The other reason people use hard money is because the properties that are financed (usually rehabs) would never pass underwriting guidelines.
For a property greatly under market value, a hard money lender will still lend 60-70% of the ARV while a conventional lender will still only lend 70-80% of the purchase price. Hard money is never cheaper than conventional financing but it’s always easier. You simply don’t use hard money unless there is a significant profit.
First thing to clarify is that most HMLs lend 70% of ARV (After Repaired Value) not LTV (Current loan to Value).
Example: House with $100k ARV, currently appraised @ $63k. Needs $10k in rehab money.
A tradition lender will in most cases only loan up to 95% of current appraised value. (Some 100% loans exisit for strong borrowers). In this example that means $59,850.00. The HML will loan up tp 70% of ARV or $70k.
Secondly, the cost difference is minimal? don't most hard money lenders charge a lot of points up front? They seem to charge many more points up front, and a significantly higher interest rate. how does that translate to a 'minimal' difference?
was trying to read up on hard money, and that statement confused the hell out of me. thanks for any clarification
Remember HML loans are Interest Only loans. Further in most cases a loan of 80% LTV or more requires MI (Mortgage Insurance). See the matrix below.
Comparison Matrix
DHLC’s Hard Money Tradtional Lender/Mortgage Co.
Time to Close; 1 - 2 weeks 4- 6 weeks
Monthly Payment ($100k loan): $1166.66 @ 14% I/O $1098.00 @ 7% + MI
Credit Qualifications: None - 70% of ARV Yes - Varies
Cost to Obtain Loan: 5% 2%-3%+ (Incl. Orig points & Junk Fees)
Pre-Payment: No Maybe