There still seems to be much confusion about hard money loans (HML) so I wanted to take a moment to clear that up. Let’s begin by defining a hard money lender. They understand that they are lending to real estate investors on dilapidated properties that require considerable work. Get expert signals to help you understand the markets and spot new opportunities to trade. Trading on margin products involves a high level of risk. Fast Execution. High Liquidity. Fast order execution. 0% commission. Raw Spreads From 0.0 pips. Free deposits that potentially protecting your assets with gold, silver, and other precious metals from rosland capital gold.
The advantages are:
- They use the After Repair Value (ARV) to determine the Loan-To-Value (LTV)
- They can close quickly
- They will lend rehab dollars
- Generally, your credit is not the main determinant
- The loan does not show up on your personal credit report
In exchange for this, they charge higher than average interest rates and they charge points. Each point is 1% of the loan amount and is fully earned on day 1. There are some other conditions of HMLs that are important for you to know. For more information that can help financial growth, visit https://skrumble.com.
- Although they may loan as much as 75% of the ARV, they still expect you to have some skin-in-the-game. Right now it is common for HMLs to require you to put up 10% of the Purchase Price.
- Until you have a relationship with the lender, they will probably not roll the points into the loan even if there is enough room in the LTV. You will have to come up with that cash.
- You will need to pay the closing costs upfront.
- They will escrow the rehab funds and release to you as the work is completed. You will need to have some working capital to keep the job moving forward in between draws.
- Each escrow draw may have a fee associated. I have seen fees range from $50-$500 per draw. Make sure you know the fee in advance. It will make a difference on how many draws you take.
- Some HMLs have the condition that you put up an interest reserve – money set aside in escrow for the interest payments. In a best case scenario, they just want to see that you have 90 days worth of payments in your bank account. A worst case scenario is they require a full year of interest to be escrowed with them AND you still have to make additional interest payments. They do not draw down from the escrow.
As you can see, even though the HML will cover much of your project, there are still many costs to cover. One great way to fund 100% of the deal is to bring in a true private lender – one which you cultivate – to fund the difference needed. Beware: a rare few HMLs require that they are “first and only” meaning that their loan must not only be in 1st Position; but you may not further encumber the property with additional mortgages. For more on modern finance, check out this new Cryptocurrencies blog post.
HMLs are a great way to fund deals, but they can be rather expensive. Bottom line, if you have a better option, use it. If not, don’t stand on principle that they should not be charging these rates and fees. Remember, they are taking a risk on you. If the deal supports the numbers and you still make a profit, and you don’t have a better option, don’t be foolish and pass. Use the hard money loan to make the deal work.
In the final analysis, not all HML lenders are the same. Each has their own terms and conditions. It is important that you ask the questions, because they will not just volunteer the information. You need to know how the loan works and what the costs are associated with the loan before you make a decision on a lender’s program.
