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Hard Money Lenders: The Down and Dirty Truth

Posted by Scarlett Dean

The window of opportunity on most good real estate investments slams very quickly. If you’re in the right place, at the right time, you stand to earn huge returns on your investments, assuming you can secure the funds you need to make the purchase. Because the approval process for conventional financing takes so long, golden investing opportunities can disappear long before your Money Lender says “yes”. A hard money loan is a great way to get your hands on the cash you need before a narrow window of opportunity slams forever.

What is Hard Money?

First, don’t let the term “hard money” scare you off. This simply refers to a form or real estate financing that carries higher costs and less favorable terms than you might be able to get if you have the luxury of waiting for a loan to be fully underwritten by a traditional lender. Most – if not all – rehab deals will not meet traditional loan guidelines because of the amount of renovations needed. Quick closings are typically also needed to keep the deal from slipping away!

Here are the most important hard money details:

You can typically borrow up to 65% of the property’s current value – The first thing you’ll have to understand when obtaining these loans is that these lenders aren’t like your friendly community lender. A lending decision is extremely quick – and is based almost exclusively on the value of the property as it is today.

Your FICO score doesn’t normally matter – Hard money lenders base loan eligibility on the value of the property. If the deal goes south, the lender can easily sell the property to recoup their funds. Because more risk is involved in a hard money loan, expect your lender to want to know whether you know what you’re doing. Do you have a business plan in place? Have you created a scope of work with a repair budget?

You’ll need some cash to get started – While these lenders are typically willing to lend up to 65% of a property’s as-is value, you’ll need to come up with some of your own cash for the purchase. Because hard money lenders understand your business, most will fund 100% of the renovation costs. Interest rates can range from 12% to 18% with 3-6points paid. Loans are usually good for 9-12 months of interest only payments. One thing to keep in mind, the interest is only paid on the borrowed funds, so as you request more of your rehab budget, your interest payments also increase.

Don’t expect your lender to cut you a check for the full amount of the renovation budget upfront. Instead, the funds will be dripped out to you in stages, as you complete different phases of the rehab. Most hard money lenders will release funds within 24-48 hours of proving that rehab work has been completed, which is verified by an inspection. Expect to pay between $200-$300 for this inspection (plus about $50 for a title search for each stage of the project).