Review of Hard Money Lenders
What to be aware of before you choose any hard money lenders.
Using transactional funding to close real estate transactions is often confused with hard money lending.
The essential “element” that differentiates transactional lending for hard money lending is the amount of it takes to pay back these loans.
Hard money loans can be for weeks, months or even years while transactional funding is typically for one to four days.
Hard money or asset based lending is typically used for real estate investors and rehab flippers to fund their purchases that will be held for extended periods from 30 days to one year or longer..
These purchases can be rental or single family properties with the end-goal of reselling them in the near future for a profit.
Sometimes a hard money loan is acquired by an investor as a bridge loan until permanent lending can be completed.
The longer the investor holds the property the less profit he will eventually make and every day counts against him.
Hard money lenders have been referred to as predatory lenders by some investors because of the higher than normal interest rates, points and junk fees they charge to a borrower.
However, these asset-based lenders loan on the value of the asset or property involved and they have to be ready to foreclose on the property to recover their money sometimes with only a few days’ notice.
When you decide you need a hard money lender for your business you’ll need to review the terms and conditions carefully as you may even personally be held responsible for the failure of the loan.
Here are some key terms and conditions to review when choosing a hard money lender –
- 1) There should be NO Junk fees what-so-ever.
These expenses can be called many things as Inspection Fee, Document Prep Fee, Loan Application Fee, Loan Processing Fee. Underwriting Fee, Administration Fee and other innovative and “descriptive” terms for what are junk fees on your closing statement.
- 2) There should be No points charged at the closing.
- 3) There should NEVER be a pre-payment penalty.
- 4) Loan terms should be flexible and be one to three years in duration.
- 5) The amount of participation by the borrower should be limited to a maximum of 30% of the purchase price and should become less with time and familiarity with the lender.
- 6) There should be No credit checks and a previous bankruptcy should not matter.
- 7) The interest rate charged should be reasonable. Because this type of loan to investors is classified as a Business to Business loan usury rates do not apply in most states and the rate should be 12% plus or minus one percent.
- 8) The amount of time to process the documents for the loan should be 1 day to a maximum of one week.
- 9) The hard money lenders should have substantial reserves so the borrower doesn’t have to worry about the lender not having funds available to come to his closing.
- 10) The perspective hard money lender should have a number of programs available for investors which should include Lines of Credit with no Administrative Fees for established rehabbers, Auction Financing for experienced investors who purchase properties at the tax deed auctions and transactional funding.
- 11) The amount of money that should be available to an investor borrower should be between $75,000 and $5,000,000.
- 12) The hard money lender should be loaning his own money so the loan is personal in nature and since “re-lenders” tend to charge higher rates and fees to cover their expenses.
Call 954-274-1003 for more information.
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In the final analysis a hard money lender can reject any applicant but the ability to borrow hard money can be the beginning of an accelerated growth rate for every real estate investor.
Apply to a hard money lender on their application so that you are always have funds ready when you need them.
What is the Difference Between a Hard Money lenders loan and Transactional Funding?
Transactional funding lenders are focused on funding double closings for real estate wholesalers and fund 100% of the amount the investor-buyer owes at closing.
The transaction is called an A – B and B – C closing where the letter “A” designates the original seller, the letter “B” designates the investor and the letter “C” designates the end-buyer for the property.
If the closing process goes as planned the A – B and B – C closings happen on the same day at the same closing agent. Occasionally the A – B closing is at a different closing agent than the B – C “leg” of the closing process.
The transactional funding lender receives his funds back at the end of the B – C closing.
The end-buyer in these transactions may be a landlord, rehabber or another wholesaler who could again resell the property. Very often the end-buyer is a cash buyer but not always.
In some cases the end-buyer does not have the cash to close and borrows money from a lender who is most often a hard money lender. The lender is designated as a hard money lender because he lends on hard assets only which in this case is the property, and not necessarily the lender’s credit qualifications.
The hard money lender is loaning the money to the investor so that a rehab of the property can be completed and resold to a retail buyer. In some cases the hard money is loaned as a bridge loan until the investor-borrower can get refinancing with a conventional lender such as a bank.
These hard money loans have “acquisition costs” for the borrower including junk fees and points added to the loan amount, paid at the purchase by the borrower or paid when the borrower sells the property.
The biggest difference between transactional funding and hard money loans is the duration of the loan and the borrower’s qualifying for the loan.
The transactional funder’s only requirement is that the end-buyer has wired his closing funds into the closing agent’s escrow account ahead of the B – C closing.
The hard money lender is always exposed to having to foreclose his loan if the investor stops making monthly interest payments.
He therefore has to make plans ahead to be able to recover as much of his loan amount as possible through the foreclosure process.
The hard money lender attempts to protect himself by doing a complete evaluation of the property before closing including, but not limited to, the After Repair Value (ARV), estimated repairs, the chain of title, any open liens and code violations.
In essence, transactional funding loans are easy to get and offer somewhat reduced risk to the lender. Hard money loans offer high risk to the hard money lender over an extended period of a few months to a full year or longer. Subsequently hard money loans require much more scrutiny of the borrower by the lender before the loan can be granted.
Call 954-274-1003 for more information.
Is a Borrower’s Credit Score Important to Hard Money Lenders?
During the period between 2000 to about 2007 many hard money lenders made billions of dollars on hard money loans based on the After Repair Value (ARV) of a property.
The borrowers were investors who usually did rehabs on properties and then sold them to a “hungry” retail market.
This soaring retail or end-buyers’ market was fueled by relatively low interest rates, stated income loans and various conventional lenders who would qualify almost anyone for easy-to-get loans.
As the real estate market turned down and the Mortgage Meltdown hit the market property values crashed.
The investors who borrowed Hard money in almost every case stopped paying their loans and abandoned the properties they borrowed against.
Almost immediately these once prosperous hard money lenders were forced to foreclose on properties.
These properties were resold at large discounts that didn’t cover their outstanding loan balances.
Literally billions of dollars were lost by hard money lenders who in many cases had borrowed the money from wealthy individuals.
From this time forward hard money lenders started to institute much stricter loan requirements including credit checks, larger borrower participations (down payments) and scrutiny of the borrower’s rehabbing experience.
Hard money loans should be asset or equity based and should not be based on the borrower’s credit or history of bankruptcy. Since the vast majority of hard money lenders are small businesses they have the ability to refuse any loan they don’t want to grant for any reason other than racial or ethnic discrimination.
If you find that your prospective hard money lender asks you for written authorization to look at your credit you should ask, “Why does it matter?” Be prepared because he will be asking for your social security or tax identification number for your business entity. You will need to comply for IRS and TSA requirements.
If you find that the hard money lender will not loan to you without pulling your credit, first try other lenders who don’t care as they will likely be easier to work with in the future.
Call 954-274-1003 for more information.