Risks of Hard Money Lending
You will be better off when you know the basics of hard money lending. The words “Hard Money” may be a bit confusing to you even though you may have heard the term before. Well, the term “Hard Money” does not necessarily mean that this money is hard to obtain. On the contrary, in reality, Hard Money loans are one of the easiest funds that one can procure.
Generally speaking and following the definition of the money market industry “Hard Money” is primarily the “unconventional asset-based lending.” In this specific type of money lending, there is a sort of collateral security for the loan offered and this collateral is ideally in the form of a real estate. However, Hard Money lending is considered to be unconventional because these loans ideally do not meet the traditionally set and required underwriting criteria of any Institutional Lenders or ILs.
A Hard Money Lender or HML was also known as Private lenders will be typically the lender of last resort as the loan has its unconventional characteristics that may be in the form of:
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Fast funding timeline
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Different types of loan and
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A liberal and flexible credit score of the borrowers.
These private lenders include pension funds, real estate funds, private individuals that have enough money available in hand to lend and insurance companies. However, a few of these may have deep pockets while the others may have limited resources to lend.
HMLs usually lend money based upon their own criteria and primarily on a short term basis. There is no restriction for the borrowers who can use this fund for a variety of profitable and useful purposes. These may also include the following real estate loan types:
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Bridge
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Development
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Refinance
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Acquisitions and
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Rehab.
Hard Money is typically more expensive than any traditional loans taken from any other sources carrying a rate of interest over and above 10%. In addition to that, you can also expect a 2 % or more added to it as the origination fees. This means you will need to have considerable financial upside to avail and use these sources. However, the benefits of Hard Money lending will outweigh the cost of procuring the loan.
The terms of it
Typically, the Hard Money loans will have specific terms and requirements that will make you eligible for these types of loans. These terms may, however, vary from one lender to another depending on their specific business policy. Therefore, you are advised to know about it and research well before you go ahead with these types of loans. You are recommended to visit reliable companies and websites such as liberty lending US and others to be safe and sure about the loan you take on.
Remember, such private lenders may charge an up-front application fee from you. Along with that, they may charge a commitment fee and a due diligence fee as well. Make sure that you find out about these and understand everything about these fees while selecting a Hard Money Lender. This is due to that fact that all these fees are usually non-refundable and therefore you will have no recourse once you sign on the loan agreement.
As per the terms a Hard Money lender generally will:
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Fund a loan for 50% LTV on raw land
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Give a loan of up to 70% LTV on the finished product
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Charge an interest rate of more than 10%
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Give the loan for a short period ranging from six months to three years and
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Also, charge an origination fee lying anywhere between 2 and 10 points that is to be paid out of the proceeds.
Usually, all Hard Money loans are either interest only or amortized. This means that a few of these lenders will fund interest, rehab money, origination fees, and others while others may not. You must know about all these options and terms when you select a Hard Money lender just to make sure that the loan fits best with your plans, you affordability, and your purpose.
Good financing option
There are lots of reasons why Hard Money lending can be a very good financing option for you. These are:
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Banks, credit unions and other Institutional Lenders will usually fill in your need for cheap money that you will be glad and able to use on all real estate deals. However, these ILs will not fund a specific market that is out there due to government regulations, lower risk profiles, stricter underwriting guidelines, longer funding timelines and much more. This is the particular segment that the Hard Money Lenders serve and support their reason for existence and success.
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Fast access to loans is another reason for the existence and survival of the Hard Money Lenders. The speed at which most HMLs can fund can be beyond the imagination and expectation of the other financial institutions. HMLS can ideally grant a loan in less than two weeks’ time after receiving all the essential documentation while most Institutional Lenders will take at least 60 days and more if at all they grant your loan that is.
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Low documentation requirement of the HMLs as compared to the ILs is another reason you may choose them. They usually grant a loan based on the value of the property which is their primary factor for considering a loan and not the borrower’s credit or financial status.
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There is no credit issue raised by the HMLs which is typically required by the ILs for any borrower. That means you can avail a loan from a HML even if you have a FICO score of less than 500, had a recent bankruptcy or foreclosure.
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Flexibility is optimal in case of HMLs when it comes to structuring the loan which the ILs is much stricter of. These are in terms of the loan term, interest reserve, cash out, and draw schedules, financing carry, and others.
Ideally, the HMLs bridge financing with their experience in real estate lending. They know that projects will not always follow the given plan and will fund gap loans if the supporting documentation makes sense.
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