Last Updated on: 29th January 2023, 06:52 am
For house flippers and generally people doing real estate, a lot of times you’re going to use a hard money lender in order to get your deals done.
And to understand this type of business financing we’ll need to define the basics. Let’s start.
So, what is a hard money lender?
Hard money lenders are businesses that lend money to real estate investors for a living. These loans are typically paid back within a period of 12 to 24 months and often come with higher interest rates than those offered by traditional lenders or private money lenders. However, it still gets the deal done.
How do hard money lender loans work?
Well, I’m glad you asked because in order to understand this we will need to discuss a few things on how money lender loans work, and they are as follows:
- Hard money loan is a loan that is based on hard assets (the actual property itself) more so than on your personal background. This means that hard money lenders are less likely to base your loan application strictly on personal income documentation, tax returns, credit score, etc. just like a normal traditional bank lender would. Hard money lenders will rather see your existing funds and property that you can collateralize. Hard money lenders won’t also care much about the property’s condition because as long as there’s a deal to be had, then they will likely lend want to you on that deal.
- Hard money loans can be relatively expensive. That means their interest rates can be somewhere around 8% to 15% of the loan amount. This loan is not ideal for non-business transactions.
- Understanding LTV (Loan to Value). Hard money lenders often provide loans that are equal to a certain percentage of the value of the property being purchased. For example, if the value of the property is $200,000, the lender may provide a loan of up to 80% of that amount. This means that the borrower would need to come up with the remaining 20% of the purchase price to complete the transaction.
- Fees. Hard money loans have an origination fee of 1% or 2% of the loan amount. This needs to be paid upfront. There’s also a processing fee which is a flat for a loan being done. Your lender will let you know how much your flat fee is.
- Is your ARV relative to your loan amount? This means that your loan has to be at least less than 75% of the ARV (after repair value) of the property. If your ARV is too small, hard money lenders are more likely to reject your loan application because that means that you’re not gonna be making any profit on the deal and hard money lenders don’t like deals that don’t make sense.
What documents are required for a hard money loan?
It varies on who your hard money lender is, but it could be any of the following:
- ID: Government-issued identification, such as a driver’s license or passport to verify your identity.
- Articles of Corporation: If you are purchasing the property through a Limited Liability Company (LLC), you will need to provide your Articles of Corporation. These documents outline the basic information about your LLC, including its name, purpose, and members.
- Operating Agreement: This document outlines the rules and regulations for how your LLC will operate, including details on how decisions will be made, how profits will be distributed, and how disputes will be resolved.
- EIN Number: If you have an LLC, you will need to provide your EIN as part of the loan application process. An Employer Identification Number (EIN) is a unique nine-digit number assigned to businesses by the Internal Revenue Service (IRS).
- Bank statements: These statements will provide a snapshot of your financial activity and will help the lender assess your creditworthiness and financial stability.
- Brokerage forms: Depending on the lender and the specific terms of the loan, you may also be required to provide brokerage forms, such as stock or bond certificates, as collateral for the loan. These forms represent ownership in a specific investment and can be used as collateral to secure the loan.
Note that when applying for a hard money loan, the lender will need to verify that you have sufficient funds to complete the transaction.
To do this, you will need to provide them with the documentation mentioned above and the following to demonstrate your ability to cover the required payments.
Costs and Fees associated with hard money loans:
- Downpayment: Can range Somewhere between 10% to 30%
- Closing cost (Origination Fee): 1% to 2%
- Rehab cost: They’ll need to see if can cover any necessary repairs or improvements cost of the property
- Six months’ worth of reserves, also known as six months’ worth of interest payments
When it comes to the property itself, hard money lenders will need you to have the following documentation:
- Purchase agreement (need to be signed by both parties): It’s a legally binding document that outlines the terms of the sale of the property. This is needed to understand the terms of the sale and the role they will play in financing it.
- Title or Escrow Setup: Responsible for handling the transfer of ownership of the property from the seller to the buyer. This defines who is handling this process and how to contact them.
- BPO (Brokers Price Opinion): To get the estimated selling price of the property and the amount of money that your lender is willing to lend against it.
- Insurance provider information: To see information about the insurance coverage on the property to ensure that it is protected in case of any accidents or natural disasters.
Note that most of the hard money lenders have loan minimums. That means that if a hard money lender has a loan minimum of $150,000, then your loan can’t get any less than that.
If the loan you were considering is outside of your budget, consider looking for other lenders with a lower minimum loan amount.
Let’s move forward and cover how you can become a hard money lender…
How to become a hard money lender?
- If you want to be a hard money lender, you will need to raise capital. To do this you have to have access to private capital. Private capital can be your own money or someone else’s money.
- You will also need access to a deal flow. To do this, you have to identify where your geographic areas are. It’s important to only do lending in areas that you’re comfortable in but if you want to do nationwide you can do that too.
- You will need borrowers that you can lend to. You can prospect offline from the existing networks of people that you already have or leverage the power of online marketing through Facebook and google ads.
- You will need to need both internal and external teams to do the business processes for you. The internal team may include loan originators (sales guys), loan processors (processing managers), marketers, and bookkeepers. And external team includes attorneys, real estate agents, contractors, title companies, etc. If you’re just starting out and don’t have a lot of budgets to outsource the responsibilities of the mentioned roles, then you’re gonna have to do most of the work yourself.
- You will need to define exactly what your business model is. This means you get to make all the rules. That includes the underwriting criteria of how much your lending is and what it’s gonna cost for the borrowers.
- Look for the right lending partner (capital investors).
To conclude, we’ll leave with a recommended list of hard money lenders that you can try out. This is for people looking for hard money lenders, not for people wanting to be one.
Recommended Hard Money Lenders:
1. LendingTree: Good option if you want to shop around and compare offers from several lenders to find the best deal.
2. Lima One Capital: Well-respected hard money lender that specializes in financing rental properties.
3. Visio Lending: Has competitive rates and flexible loan terms. They have an online application process and they’ll help you through the whole process (as they should).
4. RCN Capital: Has a strong track record in the industry for having fast turnaround times.
5. LendingHome: Offers competitive rates and fast funding. Their process is simple and transparent. No hidden fees or prepayment penalties. Online application is also available.