Hard Money FAQs
Here are some of the frequently asked questions covering hard money loans or fast loan funding:
What is a hard money loan?
A hard money loan is an alternative loan facility that provides loans for not-so-conventional loans. It is also referred to as a bridge loan, a short-term loan or an asset-based loan.
Who provides the funds used in granting hard money loans?
Private investors (individuals or groups) are the ones that usually provide the funding for hard money loans. They pool their funds and entrust this to a hard money loan broker or asset manager.
Why do hard money loans charge higher interest?
Hard money loans are more expensive than traditional bank loans because:
– Hard money loans take on higher risk. Hard loans provide higher loan-to-value ratios, especially when it involves distressed properties (i.e. fixer-uppers that need some work before they are ready for resale).
– They cover loans that traditional banks will usually not cover. For instance, land loans, loans for residential rehab projects or commercial bridge loans are some type of loans that may not easily get loan approvals from the bank.
– The processing time for hard money loans is also shorter since there is less paperwork required.
Bank lenders vs. hard money lenders: what is the difference?
Bank lenders and hard money lenders focus on different aspects of the loan application. The bank lender will usually focus on the borrower, his financial stability and ability to repay the loan. They will also require the borrower to have good credit standing. Meanwhile, hard money lenders have a more “asset-based” focus. The basis for granting the loan is the value of the asset or collateral involved.
At what instances does a real estate investor turn to hard money loan?
Traditional loans and hard money loans have their own place in the real estate industry. Usually, investors who may have good credit standing will still consider getting a hard money loan because:
– They do not have ready cash but want to take advantage of the opportunities at hand.
– They are working on deals that have a deadline and the processing time with a traditional loan will exceed the time allotted for the deal.
– They have good investment prospects but these involve deals that do not fall within the usual definition of a traditional loan. For instance, banks will not grant loans to private residences that require repair. They will want the mortgage loan to involve a house in immaculate condition.
What advantages do hard money loans provide?
Hard money loans:
– Enable individuals who may not have a stable financial source or have a source of stead income to have access to funds;
– Have quicker processing times, since hard money loans do not closely scrutinize the borrower’s financial history (i.e. income, credit rating, tax returns, etc.);
– Provide loans to situations which banks may not;
– Allow potential investors with more time to focus on finding opportunities, rather than on getting funding;
What disadvantages do hard money loans have?
Hard loans are not without their disadvantages:
– Hard loans charge more with regards to interest rates and origination fees;
– Potential borrowers need to be discerning in order to find reputable hard money lenders;
What types of properties do hard money loans cover?
For Better Than Loans, real estate properties that are granted hard money loans include:
– Commercial properties – Retail centers, industrial buildings, office buildings, restaurants or taverns, hotels or motels
– Residential properties – apartment complexes, multifamily properties, mixed use (combining residential and commercial areas) and new residential developments
– Developed land or raw land lined up for development
– Special purpose properties (i.e. schools, churches, theaters, public utilities)
– SBA/Working Capital
What documents are required when applying for a hard money loan?
Some documents that may be required include:
– Note or Deed of Trust
– Letter of Intent
– Personal financial documents of the borrower (tax returns, proof of income, investment resume). If the borrower is a corporation, the corporation’s organizational documents and tax information
– Valuation documents (Appraisal of the property, tax assessed value and realtor opinion)
– Collateral Pro Forma
– Property inspection reports