Table of Contents
- What Is a Hard Money Loan?
- Definition of a Hard Money Loan
- Hard Money Loans Explained
- What are the Points and Interest Rates on Hard Money?
- What are the Borrower Requirements for Hard Money Loans?
- Loan to Value Ratios of Hard Money Loans
- Do You Need a Hard Money Loan?
- Finding a Hard Money Lender
What Is a Hard Money Loan?
Are you planning to invest in real estate? You might have stumbled upon the term “hard money loan” in a forum online and didn’t understand what it entails.
Nope, it isn’t a shylock operating in a dark alley. So, what is a hard money loan?
Definition of a Hard Money Loan
A hard money loan is a unique loan you obtain using a “hard” asset, such as real estate. In other terms, a hard money loan is simply a short-term loan that uses tangible property as collateral. The funds in hard money loans get secured by real property instead of the borrower’s creditworthiness.
Hard money loans are alternatively known as bridge loans, asset-based loans, or short-term asset-backed bridge loans. Hard money loans are usually in the real estate industry due to their speed, flexibility, and convenience.
There are three main uses of hard money loans in the real estate industry:
- Real estate investors also use hard money loans for flipping houses. House flipping is when a real estate expert purchases a property and holds onto it for a short time, then sells it with the hopes of making a profit.
- Hard money loans are used as a quick home financing option before a buyer secures a traditional mortgage.
- They are used to finance commercial or rental properties in the absence of conventional financing.
Now that the definition is clear, how exactly does a hard money loan work?
Hard Money Loans Explained
Such loans are generally used in the real estate industry by house flippers, real estate investors, and real estate developers. The asset being purchased acts as collateral, which reduces the risk for both the lender and the borrower.
Conventional lenders such as credit unions, banks, and other financial institutions don’t offer hard money loans, so private investors often fund them. Hard money lenders essentially serve the same purpose as banks but with a different approval process and loan terms.
Hard money loans are popular in real estate because they are quicker and easier to obtain than traditional loans. Financial institutions often have a thorough process to evaluate your creditworthiness, and this takes time. However, hard money loans can be instant since they are based on the value of the collateral securing the loan rather than your credit scores.
What are the Points and Interest Rates on Hard Money?
Hard money lenders usually charge fees to borrowers for providing the loan. These fees are known as “points.” These points are generally equal to one percentage point of the hard money loan but can range from 2% to 4% of the loaned amount. Interest rates on a hard money loan may vary greatly depending on the lender, the region, and the deal. You can expect interest rates of anywhere from 10% to 15%. The average percentage for hard money loans in 2020 was 11.25%.
While most hard money lenders offer loans with a fixed interest rate, you may be able to negotiate a floating rate. The terms of hard money loans are generally around 12 months; however, hard money lenders can extend the loan term to longer terms of 2-5 years. You wouldn’t want to keep hard money loans around for a long time, though, since the interest rates are typically relatively high. The rates for hard money loans are generally higher, and the terms are much shorter than traditional loans.
Contact hard money lenders for detailed information about interest rates and points information in Los Angeles and Orange County.
What are the Borrower Requirements for Hard Money Loans?
Are you planning on investing in real estate with hard money loans? Private individuals and companies offer these loans, so the loan terms tend to differ from one lender to another.
Lenders usually take precautionary measures when giving loans to first-time borrowers. You may have to submit additional documents and information that veteran borrowers don’t need to provide.
The hard money lender must also consider your plan for the property. As the borrower, you need to provide a good plan on how you’re planning to pay off the loan ultimately. It usually involves renovating the property and selling it or securing long-term financing later on.
Loan to Value Ratios of Hard Money Loans
The ratio of a loan divided by the value of a property determines the loan amount the hard money lender can lend. This amount is known as the loan to value (LTV). Most hard money lenders lend up to 60 – 75% of the property’s current value, so you’ll require a 25% to 40% down payment to secure the loan.
Some hard money lenders even lend based on the after-repair value (ARV). The after-repair value is the estimated worth of the asset after the borrower has fixed the property. Using the ARV increases the risk for the lender, however, since the amount of capital they use increases while the amount invested by the borrower decreases. To compensate for the risk, hard money lenders may charge a higher interest rate.
Loans based on the after repair value (ARV) have a much higher risk involved, so the points and interest rate will be much higher.
Get a quote for your next hard money loan from the leading California hard money lender, RTI Bridge Loans.
Do You Need a Hard Money Loan?
To answer this, we, first of all, have to understand the purpose of hard money loans in the first place. Why would you need an asset-backed bridge loan? The main reason for these loans is to secure a property to improve and ultimately sell it later for a profit. House flippers acquire properties, renovate them, sell them as soon as possible, then pay off the loan.
Why do fix and flip investors opt for hard money loans over conventional loans? When borrowing a hard money loan, the lender focuses entirely on the deal instead of your bank statements, income documentation, and tax returns. Therefore, they can help you fund projects quickly and efficiently when you need to, even within a week. Compare that to the four to six it takes to get a bank loan funded.
The ability to acquire funding at a much faster rate than a bank loan is a massive advantage for a real estate investor. That’s helpful in hot markets when properties get many competing bids.
While hard money lending makes the most sense for short-term loans, it may also come in handy when financial institutions have rejected you for a conventional loan. Hard money lenders are willing to overlook foreclosures, credit issues, and all other issues as long as you have enough equity invested in the property.
Finding a Hard Money Lender
So, how do you get a hard money loan? To find a hard money loan, you have to contact institutions specializing in this type of transaction in your area. If you are looking for experienced California bridge loan lenders, you’re in good hands with RTI Bridge Loans. We work with new flippers and lend up to 80% LTV for residential, commercial, or mixed projects from under $250k to over $25 Million in value. Our fees and interest rates decrease over time based on a borrower’s flipping experience.
RTI Bridge Loans didn’t become the most reliable and professional direct hard money lender in California overnight. We have over 30 years of hard money lending experience. Within this time, we have processed hundreds of millions of dollars in loans for our clients in Los Angeles and Orange County. If you have any questions about RTI Bridge Loans or our loan programs, feel free to give us a call at (562) 857-2285. Click Here to Request Loan Info.