Many people ask what is a hard money loan, how does a hard money loan work, how does a hard money loan work in real estate? Others may be asking how do I qualify for a hard money loan?
The quick answer is that a hard money loan is a mortgage secured by an asset, almost always a piece of real estate. Most hard money lenders require a 30% down payment and your equity and the property itself are the collateral for the loan.
This means that the borrower is required to pay a higher interest rate and does NOT pay down the principal during the term of the loan. However, it also means that it is very quick and easy to get approved for and close a hard money loan, which means everything in many real estate situations.
Situations in Which a Hard Money Loan Can Help
There are many situations where this type of loan makes sense and can help make a person’s dream come true.
Fix and Flip, Remodel and Flip, Renovation and Flip
- Many Americans enjoy repairing and improving residential and commercial real estate and consider pursuing renovating and remodeling as a job or hobby. In a competitive market such as California’s, it is very hard to turn a profit by buying, improving and selling a piece of property. It is necessary to buy the property below market value. Most of us do not have a high enough bank balance to buy a property with 100% cash. On the other hand, the most common reason a property is available under market value is because a traditional lender refuses to approve a mortgage on it. In this case, it is possible to use a hard money loan to purchase a property, pay for any renovations and hold the property until it sells. We use hard money loans ourselves for this exact reason and we’re more than willing to answer any questions you have about this process.
Fix and Refinance an Investment Property
- To get an above average return on a rental property, it is necessary to purchase the property below market value. The only accessible and reliable way to do this is to buy a property that traditional lenders will not lend on. Hard money loans allow borrowers to purchase a property, renovate and repair it and refinance it at the higher appraisal value with a traditional lender after construction is completed. This allows an investor to get a much better long term return than if a property in good condition were purchased at or near market value.
Over the Limit of Number of Mortgages Allowed
- Conventional, FHA, VA, USDA and non-qualified mortgage (non-QM) lenders are not willing to lend on more than a certain number of properties with one borrower. Fannie Mae and Freddie Mac recently increased the limit from four to 10. Unfortunately, most conventional, FHA, VA, USDA and non-QM lenders still refuse to allow a borrower to have more than four or five loans at a time.
- Hard money lenders on the other hand use only the property itself to secure the loan. As a result, they are willing to go well above the Fannie and Freddie limits. For real estate investors this is huge because it allows them to obtain cash flow positive investment properties and hold them at the higher rate and make a profit, refinance or sell for a profit.
- It is often the case that an investor:
- 1. has enough assets for a down payment
- 2. finds a property that is profitable at the interest rate that hard money lenders offer
- 3. is either in between jobs or does not have an income for some other reason
- In this case, a hard money loan makes a lot of sense. It allows the homebuyer to purchase a desirable property when it is available (which is extremely important in hot real estate markets like California and the Western United States in general). After the property is secured, the buyer can refinance later after employment or some other form of income is again obtained and becomes verifiable (usually after 1-2 years).
- If your income is not traditional, i.e. you are self-employed, a seasonal or irregular worker or collect some other form of non-traditional income, a hard money loan is perfect for you.
- Even at a higher interest rate, owning a property is often still much cheaper than renting and a short term mortgage also allows the borrowers to refinance to a lower interest rate later if circumstances change.
- As mentioned above, the majority of California and the Western United States is made up of very competitive real estate markets. Many homes and other properties are receiving a dozen or more offers, up to several dozen. It is so important to stand out from the pack when you’re purchasing a home and the best way to do that is make an “all cash” offer and close fast. A hard money loan allows you to do both of those things and your offer will be more attractive than one that relies on a conventional, FHA, USDA, VA or non-qualified mortgage (non-QM).
Is it good to use a broker for hard money loans?
Yes. For the same reason that going to a good broker is better than going to a single bank or other lending institution for conventional loans, it is smarter to work with a broker when you obtain a hard money loan.
Here are two of the most important reasons:
1. A single hard money lender will offer one interest rate and charge a certain number of points for the loan so that, along with interest, a lender is able to turn a profit on a loan. The amount that a private lender needs to charge to turn a profit varies with different lenders. As brokers, we’re not looking at just one lender’s rates. We look at hundreds of different private lenders and choose the one that offers our clients the best deal. We’re doing the work for you to make sure you get the best deal when you use a hard money loan as a financial tool.
2. If a client works with the first hard money lender they find, not only do they risk missing out on the best deal available, but also losing money by not having the best strategy available for their particular real estate goals. At Hard Money West, our brokers also have access to non-qualified mortgage (non-QM) products and conventional, FHA and VA mortgage products. We won’t try to keep you in a hard money loan any longer than necessary. We can even help you find a loan with a lower interest rate to refinance into immediately, the moment your hard money loan has served its purpose and is no longer required.
A hard money loan is an asset based loan, usually secured only by a piece of real estate. Many borrowers fear these loans because they have a higher interest rate than conventional mortgage products. However, as mentioned above, there are many scenarios in which a hard money loan allows a borrower to achieve real estate goals that would not otherwise be possible. On top of that, hard money loans can SAVE borrowers tens or even hundreds of thousands of dollars in the long term!
Please contact Hard Money West if you have any questions about how hard money loans can help you achieve your real estate goals.