This type of funding is considered more flexible than what banks or other traditional lenders offer. Because hard money loans require borrowers to use their assets as collateral, private lenders are often more willing to work with borrowers with bad credit or more modest cash reserves.
These loans are quick and easy to arrange and have high loan-to-value (LTV) ratios, but also high interest rates.
In essence, hard money lenders also perform a credit check. The method in which they conduct a credit check varies significantly from the method used by banks and other traditional lending institutions, but that does not mean there is no check on credit.
Hard money lenders require a down payment, often one that's a higher percentage than a traditional mortgage — think 20 percent at minimum, or 30 percent or more.
Credit Criteria
Usually, a minimum credit score of 550 or higher is required to qualify for a hard money loan. However, some lenders may be more lenient and even provide financing to borrowers with a score as low as 500.
As for down payment, 20 percent to 30 percent of the loan amount is required. However, some hard money providers may require 10 percent down payment if you are an experienced house flipper. Most hard money lenders follow a lower loan-to-value (LTV) ratio, which is 60 percent to 80 percent.
Cons of Hard Money Loans
They charge higher interest rates. The lender faces considerable risk. The lender may not provide financing for owner-occupied residence because of property rules and regulations.
The interest on a hard money loan is calculated based on the interest rate, and the length of the loan. As mentioned previously, you only pay the interest portion of the loan. The principal loan amount is paid back to the hard money lender when the property is sold.
The hard money lender determines how much they can offer to a borrower by using the loan to value (LTV) ratio. The LTV metric is calculated as the total loan amount divided by the value of the property used to back the loan.
No, a hard money loan cannot be considered as cash. Unlike cash offers, which involve using existing personal resources, a hard money loan involves borrowing funds from a lender. While both options involve financial transactions, they have different implications for the buyer/seller relationship in real estate deals.
Hard money loans typically have terms of around 6-24 months. However, they can be as short as three months or as long as 36 months.
In order to offer a fast closing time, hard money lenders typically don't look into your credit history. They mainly base the loan amount on the collateral's value. You'll also likely be limited to a 65% to 75% loan-to-value (LTV) ratio — the lender wants to limit its risk in case you default.
Loan amounts of $1,000 up to $50,000 are available through participating lenders; however, your state, credit history, credit score, personal financial situation, and lender underwriting criteria can impact the amount, fees, terms and rates offered. Ask your loan officer for details.
Cash out and refinance loans can be funded in as few as 3-5 days for investment property while owner occupied hard money loans take 2.5-3 weeks due to current federal regulations.
It's not uncommon for hard money lenders to require anywhere from 10%-30% of the total loan amount for the down payment, but this varies from lender to lender. The location of the property and a borrower's experience may also affect this amount.
However, if you default on the hard money loan, the lender can take the property and sell it while the accumulated fund will be used to pay off the outstanding loan.
For example, in California, you can get your license from California's Department of Real Estate; however, you must have a broker's license and additional licensing to become a lender for hard money loans.
Hard Money Loan Interest Rates Today (2024)
Hard money loan interest rates today are currently in the range of 9.5-12% for a 1st position loan. 2nd position hard money loan interest rates range from 12-14%.
Documentation that should be included is as follows: a copy of the purchase contract (if you're buying a new property) or Broker's Price Opinion or other market analysis (if you're refinancing), an appraisal, the Commitment for Title, a copy of the survey, inspection reports, and contractor repair estimates (if any ...
A hard money loan balloon payment is the total principal balance of the loan plus one monthly payment due in full at the end of the loan term, which is usually 6-24 months from the start of the loan.
In order to accomplish those goals, hard money loans are structured differently than traditional mortgages. Current hard money loan rates, as of 2021, vary between about 7.5% and 15%. Every hard money lender, however, offers slightly different rates and fees.
While hard money loans are not cash, they are often considered cash equivalent because they differ from traditional loans. A bank will provide you with a mortgage based on the market value of the acquired property (i.e., the purchase price).
If a lender quotes you three points, it means 3% of your loan amount. So, if your loan is $100,000 with three points, that means it's a $3,000 fee.