“Most require a minimum of 20 percent, while others want to see 30 percent or more. Again, they are looking at the value of the real estate as the primary means of repayment,” Ailion explains. “If you don’t repay, they take the property or payday loans Erin finance asset and sell it to satisfy the debt.”
Pros of hard money loans
- Accessible to borrowers who have equity but aren’t eligible for traditional loans
- Money can be available quickly, usually within two days
- Usually don’t require credit checks or financial disclosures
Flexible loan terms
If you have assets or property to use as collateral, it doesn’t much matter what your credit history looks like when it comes to a hard money loan. Hard money lenders tend to be flexible when it comes to negotiating loan terms; they don’t have to adhere to the same regulations that conventional mortgage lenders are subject to.
Compared with the glacial pace of traditional mortgage underwriting, hard money loans can be processed in just days to weeks. For real estate investors, speed can sometimes make all the difference when it comes to closing a deal – for example, when bidding on a competitive property at auction.
Don’t require strong credit history
You don’t need a good credit score or loads of financial documentation to get a hard money loan. While traditional mortgage underwriting focuses on borrower income and credit history, hard money lenders extend loans based on collateral, such as a house or building. For this reason, hard money lenders need to know the estimated market value (after-repair value) of the property after the planned renovations are completed.
Cons of hard money loans
- Interest rates much higher compared to conventional mortgages
- Processing fees are costly, up to three points or more
- Usually comes with prepayment penalty
- Large down payment, usually 30 percent or more
Hard money loans are costly compared to traditional loans. The interest rates can be several percentage points higher than for conventional mortgages, and the upfront fees are also expensive (as high as three to five points or more). Closing costs are likely to be steep as well, and there is a significant down payment requirement. In addition, you could be charged a prepayment penalty if you pay your loan sooner than the term dictates, which can add to costs.
Conservative loan-to-value (LTV) ratios
You’ll need significant assets to qualify for a hard money loan. Hard money lenders typically require a loan-to-value (LTV) ratio of around 50 percent to 70 percent. That’s considerably more conservative than for conventional mortgages. For instance, Fannie Mae guidelines specify an LTV from 75 percent to as high as 97 percent.
Hard money lending regulations
Hard money lenders are subject to federal and state laws that bar them from lending to those who can’t repay the loan. By law, hard money lenders have to establish that a borrower has the means to make the monthly payments and any scheduled balloon payment.
“The best place to look for hard money lenders is to consult with your real estate agent, your title company or your title attorney,” recommends Robert Taylor, a full-time real estate investor in Sacramento. “Title offices record loans for hard money lenders regularly and can give you referrals to hard money lenders who lend in your area.”
If you have a connection, you could also try checking with real estate investment groups in your town that are likely to have relationships with hard money lenders. Additionally, you could explore national online lenders that provide loans for residential or commercial investments. Some lenders, like LendingHome, Lima One Capital, and Patch of Land, focus on investors who are renovating and flipping properties. Visio Lending is another hard money lender covering rental property investments, and Finance of America Commercial and Delancey Street offer financing for commercial properties.