The Definitive Guide To Hard Money

Getting a hard money loan is not as easy as it sound. I receive plenty of questions regarding this topic. For this reason, I have deiced to list some of the most common questions I hear about hard money loans, and here they are:

If I’m working with hard money lenders, will they take care of the legal documents, and stuff for a real estate investment property?

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Most likely the hard money lender will prepare and execute the legal documents needed for the hard money loan, i.e., the promissory note and deed of trust (or similar).  Typically, the hard money lender will not prepare the real estate contract/purchase and sale agreement.  Those legal documents would be prepared by a real estate broker or an attorney.

Up to how much can I borrow from a hard money lender?

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There are hard money lenders who will lend 100% of the funds needed to purchase investment real estate. There are also hard money lenders who will loan the purchase amount, rehab costs, closings costs and down payment.

However, in most situations, this will require that the borrower has another property owned “free and clear” to put up as collateral.  Therefore, if you don’t own any real estate, a hard money lender will not lend you 100% of the funds needed to purchase investment real estate regardless of how “great” the deal is.

In some situation, you may be able to present your “great deal” to a hard money lender, and they may offer to become equity partners rather than take the lender position. The terms will differ depending on the situation, but this arrangement may allow the borrower to remain involved in the deal with little resources committed.

Are there any private lenders in the world, who lend money without collateral?

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No, an essential element of a hard money loan is the collateral which is the security that allows the hard money lender to advance loan funds to a borrower.  If you do not have collateral, you may want to find an equity partner.  Often hard money lenders are willing to become an equity partner for the right terms and situation

Who can I ask for a hard money loan, and how do I find them?

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Hard money loans are facilitated by hard money lenders.  A hard money loan is not the same type of loan as a personal loan.  To find a hard money loan simply search “hard money lender” and your city.  Another effective way to find a hard money lender is to ask your real estate agent or banker for a referral.

Are hard money loans only for real estate?

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Historically, yes hard money loans are synonymous with real estate purchase, refinancing, and development.

Do hard money lenders lend money to buy a foreclosed property or not?

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Yes, many hard money lenders lend specifically for foreclosure properties.  They also provide services to help their borrowers purchase those foreclosures “at auction” which means they will help their borrowers buy a property that has gone through the legal process of foreclosure and is now at the stage of the foreclosure auction.  This process varies from state to state so contact your local hard money lender for detailed answers specific to your state.

What is hard money, and is it good for investing in real estate?

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A hard money loan commonly refers to real estate-based loans whereby the loan is secured against real estate in the form of a deed and a promissory note; typically, with lower qualification levels with rates & fees above bank and credit unions.

Traditionally the phrase, “hard money loans” and “private money loans” when referring to real estate-based lending are interchangeable. All real estate-based hard money loans are secured (against the real estate) however when referring to the broader term “private loan” it can be either secured or unsecured. For example, a student loan can be a “private loan” which may be unsecured.

Therefore, a hard money loan is not an option for student loans or personal unsecured loans.  Hard money loans are facilitated by hard money lenders who are traditionally individuals or private companies which manage the lending of capital in the real estate industry for the purchase, renovation and/or development of investment properties.

Hard money lenders are not the bank or a credit union; however, some hard money lenders have established a professional relationship with a banking institution in the form of a line of credit which the hard money lender can use to fund loans.

In that case, the hard money lender becomes a pseudo-extension of the bank and thus requires more of the borrower to qualify than a traditional hard money / private lender.  An example of “additional qualification” is if the hard money lender requires an appraisal for a purchase.

This requirement is a telltale sign that the hard money lender is not working with independent capital, and the borrower should be aware that a banking institution may be involved in the background and may continue to require additional qualifying factors resulting in a very bumping at best transaction, and quite possibly a failed transaction because of the banking institutions underwriting requirements.

An example of this property condition or additional security request.   One of the major benefits of borrowing hard money is that the borrower can expect quicker funding and less qualification than with the bank or credit union.

How is hard money different from cash, and can it be used for an “all cash” deal?

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The difference between hard money and cash when submitting an offer for purchasing real estate is slight; however, it can cause an issue if you don’t understand the difference explained here. When submitting the offer, you need to be prepared to answer the seller's questions such as “is this offer financed or cash?”

Often the seller is attempting to understand by quantifying the process the buyer is going to go through to qualify and close the transaction successfully. In this respect hard money and cash are very similar in that with “cash” there are no qualifications – you would simply transfer the funds to close and thus is preferred by most sellers.

Hard money is very similar in that the borrower or buyer is not going through an extensive qualification process to obtain a loan. The hard money lender is elevating the borrower on the strength of their collateral rather than the borrower’s ability to repay the loan. Although there is, in fact, a qualification process with a hard money loan, many sellers understand that a hard money loan is very similar to cash in respect of closing quickly.

However, technically hard money is not the same financing as cash so be aware when submitting your offer, you may violate the terms of your purchase agreement if you change from “cash” to “a hard money loan” assuming these two types of financing are the same.

Consult your real estate broker or attorney, and they should be able to help you comply with the terms of the agreement.  In many situations, a simple addendum included with the initial offer will suffice

Is a hard money loan ideal to buy an owner-occupied house?

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Hard money lending is a type of private financing used when purchasing or refinancing a real estate investment transaction.  It is commonly used to purchase real estate, i.e., homes to fix and flip however it cannot be used to purchase a home for the borrower to live in (owner occupied).  An owner-occupied loan can be obtained from a mortgage broker, bank or credit union.

What is necessary to apply for hard money loan?

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The requirement for a hard money loan will vary depending on the hard money lender you are applying with.   The basic requirements will be the address of the subject property, your contact information, proof of funds if you are using cash as collateral, the address of the collateral real estate (if you are using other investment real estate as collateral), a date by which you need the funds and an amount.

What does ‘no pre-payment penalty’ mean, and what will happen if I can’t paint my loan from private money lenders?

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Length of time which you need to pay back the hard money loan is a critical element of a hard money loan.  If you are “Flipping” a house, be sure to calculate renovation time, marketing time and the time it will take to sell the finished project.

A common mistake is only calculating the renovation time or simply not creating a realistic timeline which will result in more fees from the private/hard money lender at best and a foreclosure in the worst case. The pros know to add a few extra months up front to give them extra time to pay the loan off.  Most typical private loans are 6, 9 or 12 months.

You may have heard the term pre-payment penalty or asked, “What do hard money lenders mean by 'no pre-payment penalty'” A pre-payment penalty sets the minimum amount of payments which will be made on a specific loan. If there is no pre-payment penalty you are free to pay the loan off as soon as you would like.  *insider hint – even if you have a pre-payment penalty you can still pay off the loan when you want you simply must pay the fee, which may be worth it depending on the situation.

The risks of obtaining a hard money loan vary from state to state because foreclosure is the most common remedy for a defaulting hard money loan.  Therefore, if you don’t have the funds to pay back your hard money loan, be prepared for your hard money lender to foreclose on the subject property.

Depending on which state the subject property is in, the foreclosure may be judicial or no n judicial, and thus you may or may not be responsible for a deficiency judgment. If you detailed questions about this situation, please contact a real estate attorney to discuss your options.

What is the best way to use a hard money loan?

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Here are the best ways and the worst ways you can use your hard money loan:
Recommended Uses Of Hard Money Loans

  • Closing fast on off-market real estate
  • Pulling cash out of currently owned investment real estate
  • Purchasing real estate that can only be purchased by “Cash”
  • When bank financing has failed due to borrower credit history
  • Refinancing current hard money loan

Worst Uses Of Hard Money Loans

  • Buying your first home to live in
  • Consolidating personal debt
  • Buying a car for personal use
  • Student loans
  • If you can qualify for a bank loan *in some situations borrowers who can qualify for a bank loan will elect to borrow hard money because of the flexibility and speed of funding.

What is a point in hard money lending, and do you pay it with the loan payoff?  

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The “points” or “a point” when referring to a hard money loan are the fee that the lenders are charging the borrower, typically 1-point equals 1% of the total loan amount.  Example, if the hard money lender is charging 6 points on a $100,000 loan, they are charging $6,000 worth of fees.

Most hard money lenders will receive their fee upon funding of the loan. Therefore, it results in very little if not zero out-of-pocket expense to the borrower.

What are the typical interest rates given by hard money lenders lending?

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Federal, State and local laws regulate hard money loans. Therefore, there is no standard rates or terms for hard money loans; the rates and terms will be specific for your regional location based on Local, State and Federal laws.

However, you can expect to pay more fees and a higher rate than the bank or credit union.  The higher fees and rates reflect the increased risk to the hard money lenders investors because of the lower qualification of the borrower.

Most hard money lenders will heavily consider the equity position of the subject real estate as the major deciding factor in granting the requested loan, rather than how the bank evaluates a loan application including the borrower’s credit score and borrowing history amongst many other factors.

There is no standard length of a hard money loan however most lenders offer loans with 6 – 18-month maturity (when the loan is due).   Most hard money loans are offered with “interest only” payment options which mean upon maturity of the loan the hard money borrower will pay back the entire principal amount.

There is also no standard LTV (loan to Value) ratio for a hard money loan. The LTV ratio compares the value of the subject property verse the amount of the loan secured against the property.

What are some easy ways to obtain a hard money loan?

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If you own an investment property either by purchasing with cash, paying it off over the years or by inheriting you can use that property as collateral for a hard money loan.  This is the fastest and easiest way to obtain a hard money loan.  If you don’t own investment real estate the easiest way to obtain a hard money loan will be to create collateral with cash.

What are the main benefits of bridge loans? And is it harder to get than a hard money loan?

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The main advantage of a bridge loan is that you can close on the second transaction while your first transaction is still pending.  A bridge loan can be offered by a banking institution or a hard money lender. Historically, there is more of a qualification process with banking institutions than with a hard money lender.

What is the best way to access private money to invest in real estate and how do I present my idea to lenders?

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Private money to invest in real estate can be accessed in several ways; the two most common are hard money and equity partnership. Hard money will require the buyer to become the borrower by which they will pay points, fees and a higher than market rate.

The benefit is the buyer/borrower will maintain control of the project and benefit solely from the success of the project.  An equity partnership may also be an option if the buyer cannot qualify for a hard money loan, therefore creating a partnership with a funding source. In these situations, the buyer relinquishes much of the control to the funding source.

This can be attractive to a buyer as this option may be the only option available to secure the opportunity. When considering the equity partnership option, the buyer should consider the presentation of the deal to the equity partner.

The equity partner will want confirmation that not only the deal is solid but also the buyer. Do your homework, be prepared to answer questions about the market, other similar projects, and any potential pitfalls.  Every deal has its “hair” best to address that upfront by presenting your solution to resolve the issue.

What do you call the difference between the hard money loan you got for a certain deal? (Basically, the money YOU put in)?

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The difference between the hard money loan and the amount of the purchase typically is your equity/collateral and is often the amount of money you put into the transaction.

Is it possible to get a loan from a hard money lender for real estate investments only by putting my other company up as collateral?

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Yes, if your company or business owns real estate.  In this situation, the hard money lender would be securing the hard money loan against the real estate owned by the company and not necessarily your company or business.

Some collateral lenders will offer a private loan secured against collateral and most likely a personal guarantee. Most commonly, this private loan from a collateral lender would be considered a collateral loan and not a hard money loan. This distinction might be getting into semantics but might also help you track down the correct lender to help your specific situation.

Why do hard money loans have such high interest rates?

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Hard money loans typically have higher rates to offset the risk of lending funds to a borrower based on the collateral associated with the transaction rather than solely on the borrower’s ability to repay and the borrower’s credit history.

If you are considering a hard money loan, and the interest rates seem too high for your specific needs. Perhaps you should reconsider the quality of the opportunity.  This is not to say that you shouldn’t be diligent about the rate of your hard money loan rather most successful hard money loans can easily be justified by a quality opportunity.

Is it advisable to get a house loan from a bank or private lender?

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As a real estate investor, you should always consider the lending option which will be the lowest rate and fees.  The lowest fees and rates can typically be found at a banking institution.

If a bank or credit union is not an option or if your opportunity cannot support the timeline for a bank or credit union to fund your loan, you should consider other options such as a hard money loan and or a private loan. Please also note that hard money loans cannot be used for owner-occupied home loans.

Why do you need hard money lenders as an investor?

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Hard money lenders can help you as an investor in several ways. First, leveraging your capital to participle in more projects.  Leveraging should only be done by experienced hard money borrowers and after considering all the potential risk.

Second, hard money lenders can help you evaluate the quality of a given opportunity to help you make a good decision. In this role, the hard money lender becomes a pseudo advisor and an invaluable member of your team.  Many of my clients will contact me in this capacity well before they commit to moving forward.

Why don’t people just use hard money lenders to buy expensive properties?

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Some borrowers do in fact use hard money lenders to buy expensive properties depending on the situation.  Perhaps the borrower has been turned down by their bank and would still like to purchase the property; this often results in a hard money loan.  In this situation, the expensive properties, of course, must be investment properties, and not owner-occupied.

Why should I choose a hard money loan over a conventional loan?

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You could consider a hoard money loan over a conventional loan if you have been turned down by your bank or if the conventional loan funding timeline does not allow you to excuse on your given opportunity. Conventional loans typically have more attractive terms and rates, therefore if you’re and your opportunity can support the underwriting and funding timeline of a conventional loan, most likely a conventional loan will be your best bet.

Why do money lenders give credit to people who are not likely to repay?

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Hard money lenders are lending to a situation rather than specifically to a borrower.  Hard money lenders are aware of a borrower’s ability to repay however if the borrower does not repay, the borrower will be putting their collateral at risk which often a hard money borrower will avoid.

Will lenders loan money for just one day?

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Yes, this type of loan/funding is called “table funding” and can be obtained by applying with a hard money lender.

How do people get approved for multiple mortgages for rental properties?

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Their bank or credit union can approve real estate investors for up to 8 units before they need to secure other types of financing.  This limit is set by the federal government and changes every few years.

Banking institutions do offer specialty loan programs sometimes referred to as a portfolio loan to service real estate investors who have amassed large real estate holdings.  Hard money loans can also be a reasonable way to finance multiple rental properties.

Is it illegal to use a personal loan to pay off a private loan for school?

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A high-interest loan either a personal loan or a hard money loan cannot be (it is illegal) use to pay off consumer debt such as a private loan for school.

How to pay interest on a hard money loan while rehabbing the property/ Do hard money lenders charge interests monthly or at the end of the loan?

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You can either make the interest payments monthly with “cash out of pocket,” or you can negotiate the terms with your hard money lender that the payments be added to the loan balance.  Another option would be to prepay the interest payments out of the loan proceeds when the loan funds.

How much does loan servicing cost for real estate seller financing?

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The rate associated with loan servicing will vary depending on the terms of your loan.  When considering hard money as a loan option the rate for loan servicing can be 0.5% - 2.0% or more, again depending on your specific needs.

I found what appears to be the perfect home to meet my specifications, but it is listed only as accepting cash offers. Can you buy a cash home with a loan?

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Yes, typically homes that are advertised as “cash only” will accept an offer that includes a hard money loan. If a home is listed as “only accepting cash offers” there could be a few reasons for this stipulation.

Most commonly the reason for stating this requirement is either the sellers want to close quickly (cash is the fastest financing method to close), or they believe the subject property may involve an aspect which may be counter to some potential buyers financing from a banking institution.

Property condition is the most common concern of sellers in this situation.  One caveat to this answer, is that hard money loans can only be used for owner-occupied properties, so if you have found the “perfect home” advertised “cash only” and you have decided to use a hard money loan, please note that is only a solution if you are attempting to purchase the property as an investment property.