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Hard Money Loan
The hard money loan is a private loan in which actual cash is transferred from the lender to the borrower for the purpose of making a large purchase, usually a real estate purpose. The hard money loan is unusual because of the large transfer of hard money rather than the exchange of money through seller or lender carrying on the home. The hard money loan is a risky loan for lenders and often comes with a high interest rate. However, because the hard money loan is a private loan, the terms and agreements of the hard money loan are generally negotiable.
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Understanding the hard money loan
The
hard money loan is often expressed in complex real estate terminology
which makes it difficult to understand but the hard money loan is actually
a very simple concept. It is the provision of an actual cash loan made to
a borrower by a private lender. The hard money loan is not subject to the
stringent guidelines of a federal or conglomerate lending institution and
is therefore negotiable with the lender.
People who apply
for the hard money loan
The hard money loan is a private loan
which does not require the same stringent guidelines as other loan types.
For this reason, the hard money loan is often sought by people who:
•
Have a history of bad credit
• Have no credit
• Have previously had
a home foreclosure
• Have unverifiable income
• Must refinance
immediately
• Need hard money
In other words
Another way of thinking about the hard money loan is to consider it
the pawn shop equivalent for real estate. The hard money loan is available
with few questions asked and is given in cash. The cash can be used, as
intended, for the financing of the home or it can be used by the borrower
in some other fashion. Either way, the hard money loan will still need to
be repaid and the home is at stake. This makes the hard money loan a risky
loan.
Pros and cons to a risky loan
The hard
money loan is risky to the lender because of the commonly poor credit
history of the hard money loan borrower. This means that the hard money
loan lender is in a prime position to charge a high interest rate and
excessive repayment failure penalty fees. This puts the hard money loan
borrower in a negative position. The benefit is that, as a private loan,
it is easier to qualify for the risky loan and the terms are somewhat
negotiable in comparison to other loan types.
The hard money loan
is risky for the borrower because of the accessibility to large amounts of
cash. The hard money loan provides cash to the borrower which the borrower
must be responsible for in terms of using it appropriately. Failure to
make repayment on the hard money loan can result in excessive debt, bad
credit and even home foreclosure. The responsible hard money loan borrower
will be able to avoid these pitfalls but the irresponsible or immature
borrower should think twice before applying for and accepting the hard
money loan.
Hard money is non-traditional money that comes form investors who are looking to make profit in real estate without having to have spend time or effort in investing.
It is simpler to get into, credit is typically not an issue in hard money. The issue with Hard money is loan-to-value. Loan to value is not on when you buy a property but on a finished value.
For example: You found a house for $350,000. Your loan officer or bank will inform you that an appraiser came back and this property needs new roof, lots of deffered maintenance and so one., so bank or your loan officer will say that do not want to loan money one that kind of property.
When a hard money lender look at this property, they see an opportunity. You have a buyer, investor and a lender who both see and want to capitalize on the opportunity in the market no matter what the condition of a market is.
Hard money lender will typically lend 65%of the value. As an investor you can put money into a property, get it fixed up and everybody is getting a nice return on that. As long as hard money lender is loaning 65% of the finished value, meaning there will be a 35% profit left in the deal.
Timing: Hard money lender sees the opportunity and
they know if they do not move quickly on the deal or someone else will.
For timing of a loan itself, typically it is 6 months to 1 year basis. You
need the money to get the house, fix it up, and sell it.
Interest: Interest is a very simple formula. You take your interest rate x principal / 365 x number of days you actually use the property. No annual compound or other formulas that are found on conventional loans.
If you worried that you will not make payments while you are fixing a property, there are even loans that can accomondate that so you will be making only interest only payment, or maybe no payment at all. It is all negotiable as there are no rules!
Back to our example: You found a house for $350,000 and you get a hard money at 13.88% ( it is high because hard money lender wants to make money) + 4 points ( hard money lender will charge you around 4 points to make this deal).
What does it cost? Let's say it will take 5 months, thefore 13.88% = $4113/monthly payment x 5 months = $20,565 in interest that you will pay in 5 months. Than you have to pay an extra 4 points which is $14000. So you will pay $34,565 for the use of the money in about 5 monts period.
Now you turn
around the property and you sell it for $550,000. That is $200,000 profit
- $34,565 = $165,435 a pure profit you made in 5 months.