Hard Money Basics
How Hard Money Loans Work
When loans need to close quickly or when you cannot get Underwriter approval for a loan, hard money can be beneficial. Let’s review how these loans work, for you and your borrower’s benefit.
What Is Hard Money?
If a client has negative items on their credit reports, or an income that is difficult to verify or the property condition is poor, then the loan approval process can take too long for your borrower or they may not ever get approved due to these circumstances. This is where Hard Money comes into play.
Hard money is a way to obtain a real estate loan with financing provided by private individuals, known as Investors. They lend money based on the equity in a property – and this is used as collateral.
Hard Money Lenders take a different approach than traditional or conventional lenders; Private investors lend based on real estate equity as collateral, securing the loan. If a borrower should default on their loan, the investor will usually recoup their investment by repossessing the property and selling it. For this reason, investors are more concerned with the value of the collateral than with the property condition, finances or credit of the borrower.
Most hard money lenders keep loan-to-value ratios (LTV ratios) relatively low. Their maximum LTV ratio might be 65% to 75%. With ratios this low, lenders have the knowledge and comfort of knowing they can foreclose on the property quickly with a reasonable expectation of recouping their investment should you default.
Hard money loans are generally short-term loans, lasting from one to five years. Find out here what’s needed to submit a loan for our review & approval.
Why Conventional Brokers & Loan Originators Use Hard Money?
Hard money has its place for certain borrowers who cannot get traditional funding or need a quick close:
Speed: Because the investor is primarily focused on equity, hard money loans can be closed more quickly than traditional loans. The process can move quickly, giving you the ability to close transactions in less than a week in some instances. This gives you an important advantage with your client, especially in hot markets with multiple offers.
Flexibility: Hard money agreements are more flexible than traditional loan agreements. Private investors don’t have to stick to a standardized underwriting process. Instead, they evaluate each transaction individually and therefore the lending qualifications are much less than a traditional loan.
Fast Approval: The most important factor for hard money lenders is equity. A secondary factor considered to determine your client’s credit worthiness, is their ability to repay the loan. Negative items on their credit report, even a foreclosure, are less important to hard money lenders than the ability to make the required mortgage payments.
When does Hard Money Make Sense for your client?
Hard money loans make the most sense when an all-cash offer would make for a stronger purchase offer, when fast cash is needed, or your borrower is looking for a temporary or short-term loan.
Speed of financing – such as a loan turned down while buyer needs to close Escrow in the next week or two; Fix-and-flip buyers – property condition and short-term loan circumstances; Bridge loans – buying a home prior to selling one’s current house, are all good examples of hard money borrowers.
Hard Money works differently from traditional loans in that they have higher rates due to higher risk for the investor but they offer faster speed to funding/ closing on a deal and less red-tape qualifications to go through.
How To Handle Hard Money “Drawbacks”?
A Borrower may think hard money has higher rates than traditional and conventional loans. Remember, these are considerably lower than credit card rates, but the higher cost and shorter term of the loan can be considered drawbacks to some borrowers.
It really is just a question of, “If they need or want Hard Money, can they afford the interest-only payments and how are they going to pay off the loan when it balloons?” Many a borrower has realized with interest-only payments, the cost of a hard money loan is close to, if not less than their current monthly payments they are already making! It is a math equation so remove the rate from the conversation and lay out the monthly payments to your borrower.
If a client can qualify for other forms of financing, they might be better served with those loans programs.
How To Find The Right Hard Money Lender?
There are precise hard money State and Fed regulations that must be followed for a proper transaction. To borrow money, you’ll need to connect with investors and licensed Brokers.
Sun Pacific Mortgage has been in business since 1988 and is licensed throughout the state of California. We have helped thousands of Home Buyers, Borrowers, Realtors, Mortgage Brokers & Lenders with our Hard Money loan programs.
We hope we get the opportunity to work with you and your clients. Please call us at 707-523-2099 or reach us through email by filling in the form below.
Don’t hesitate to CALL NOW (707) 523-2099 for a free proposal, have any questions answered, or to start your loan process.
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