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Hard Money for Real Estate Investors

Hard money loans are commonly used for financing needs by real estate property investors who engage in substantial rehabilitation and renovation works. A Hard money loan is different from other conventional property loans offered by mortgage lenders. The guidelines and lending criteria that determines the eligibility of a borrower or property for hard money financing are much more flexible and accommodating. There are many misconceptions regarding hard money especially related to the lender’s criteria and their financial requirements.

Hard money loans are purely collateral or asset-backed loans. Real estate is the most common form of collateral on which these private investor loans are sought. Majority of the real estate lending space is dominated by commercial banks and mortgage lenders. They usually give loans to borrowers on residential and commercial properties that fit the criteria set by government agencies such as FHA, FannieMae(FNMA) or Freddie Mac. These underwriting terms are quite inflexible and restrictive. Unless a borrower has pristine credit with good income and assets, it is hard to qualify for a loan. In addition to strict borrower eligibility guidelines, the property must also satisfy a number of factors related to condition, occupancy, no. of units and zoning. These conventional loans make up a majority of all the real estate loans as these are preferred by anyone who qualifies for them. But for real estate investors these restrictive loans are not suitable and they usually opt for hard money.

Hard money lenders generally lend their own funds or funds raised through investors who are promised a decent return. This used to be the case till very recently; but this is no longer the only source of hard money lender’s funds. Due to the unprecedented number of foreclosed homes, the number of properties that need financing for acquisition and repairs by investors has gone up quite a lot. Sensing the high demand hard money lenders have raised large pools of funds to meet the demand. Most of the hard money lenders have a keen understanding of the local property markets they lend in. The most important factor that influences the lending decision is the collateral and the equity cushion it provides.

The LTV (Loan Amount to the Value) is usually expected to be below 65% of the property’s conservative market value. This may vary according to individual lender’s hard money guidelines. Most investors seek hard money for rehabilitation or renovation. For such deals, the repairs usually add substantial value which in turn creates significant equity. This After Rehab Value (ARV) is also used by some lenders to determine the eligibility of a loan seeker for hard money. Having good credit and documentable income, assets is a pre-requisite for qualifying for a loan from banks and conventional lending sources. These factors are given less importance and in some cases, almost overlooked by hard money lenders.

For the risk involved in hard money lending, the interest rates charged on hard money loans are much higher. They can range anywhere from 12% to 20%. The loan repayment is usually waived during the period when the property is being repaired. The high interest rates usually don’t scare seasoned real estate investors as they to repay the loan in a short duration, usually as soon as the property can be finished. When the works are completed on the real estate, the proper is cured of its earlier ailments that prevented it from getting a conventional loan. The investor or borrower usually opts for a permanent source of financing from a traditional lender now or he may sell off the property.

Hard money loans are not suitable for everybody. They are quite valuable for short-term purposes, especially when the investor is experienced in undertaking and completing the types of projects for which he is seeking funds. Lenders give due consideration to the experience of the borrower in tackling the project work to be undertaken on the real estate. Having well established relationships with local hard money investors and lenders is paramount to successful real estate investing.