How much do you have to put down on a hard money loan? In most cases, the house flipper is required to put down between 10% and 20% of the project cost. For example, if the hard money lender covers 85% of the project cost, the investor would need to cover the shortfall of 15%.
Don't require a strong credit history: You don't need a good credit score or loads of financial documentation to get a hard money loan. While traditional mortgage underwriting focuses on borrower income and credit history, hard money lenders extend loans based on collateral, such as a house or building.
Unlike a traditional home mortgage, hard money lenders typically only charge interest on a monthly basis, which means you don't actually pay any money toward the principal loan amount at each monthly payment cycle. However, you will have to pay back the full principal amount at the end of the loan's life cycle.
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.
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%.
Here are the common types of prepayment penalties you might encounter: Fixed Penalty: This is a flat fee or percentage applied if you repay your loan early, as is the case with Yieldi's 3% penalty if paid before 6 months. The penalty amount remains the same regardless of when within that period the loan is paid off.
A hard money loan is funded by private investors for a term of about 12 months. Sometimes the term can be extended to 2-5 years.
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.
Finally, hard money lenders do not make consumer loans, so to make sure the lender knows the loan is a business investment, you should set up the real estate under an LLC.
Traditional lenders don't issue hard money loans. You get them from individual investors or private companies. Borrowers may turn to hard money loans after a loan or mortgage application is denied or to avoid the lengthy process of getting approved for a loan through traditional methods.
Hard money loans may be used in turnaround situations, short-term financing, and by borrowers with poor credit but substantial equity in their property.
The points associated with a hard money loan can vary between 1 to 3 points. For example, on a $100,000 loan, 1 point is equal to $1,000 and 3 points is equal to $3,000.
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).
Private Lender Loans
Private lenders are individuals or companies that offer loans using their own money or funds from investors. They work independently from traditional banks, giving them more flexibility in the types of loans they offer and the borrower qualifications they require.
Your lender may ask you to provide a down payment of 10% to 30% (or more) on your hard money loan. Generally, the stronger your credit and financial qualifications, the less of a down payment you'll need to provide. However, a larger down payment may help you access better rates and terms.
Income Considerations
Hard money loans aren't based on the borrower's income, but the lender still needs proof that the borrower has the means to repay the loan. Typically, a borrower's income is verified by reviewing bank statements, tax returns, or pay stubs.
Hard Money Loan eligibility
In some cases, hard money lenders require inexperienced investors to have a credit score of at least 620, as well as additional collateral, such as your home or another valuable asset.
Foreclosure proceedings: The foreclosure will take effect if the loan cannot be repaid. The hard money lender will file a Notice of Intent to Foreclosure at the local authority. After which, the lender will issue a notice of sale, and this will specify the date, time, and location of a foreclosure auction.
The bank will pay off the hard money loan and the investor will now be responsible for a long-term mortgage at substantially lower interest rates. The net proceeds from the rent they charge and this mortgage payment will mean cash in their pocket every month, all while building equity in their portfolio.
Besides, you might also face a significant pay date with a large balloon payment. However, thankfully there is a way out of this situation: to sell your property. But lucky, you can hold on to the property for a more extended period by refinancing the hard money loan and converting it into a conventional loan.
The typical terms for hard money loans range from six to 24 months. In order to offer a fast closing time, hard money lenders typically don't look into your credit history.
Hard money loan terms are usually short, typically lasting 1 – 3 years. This fast turnaround means lenders will profit quickly – either from interest on the loan or if you default on the loan. Let's take a look at how higher interest rates come into play with hard money loans.
The cost of hard money loans is generally higher compared to traditional commercial financing. Hard money loans have a rate of 10 percent to 18 percent. Meanwhile, traditional commercial loans typically have rates between 1.176 percent to 12 percent.