Residential hard money loans are a valuable source of financing for active real estate investors engaged in rehabilitation or fixing-up of residentially zoned single and multi-family properties. Traditional loans offered by banks and mortgage lenders follow strict underwriting criteria based on lending guidelines that are inflexible and unaccommodating for financing unconventional loan scenarios. To successfully take advantage of profitable and rewarding investment opportunities, a property investor will need to count on a reliable and consistent source of funds from a hard money residential lender in their area of focus. Unlike traditional mortgage home loans that are made out for a lengthy loan term, residential hard money loans are given out only for short-term duration. Due to this, investors only rely on hard money for temporary bridge financing.
Overview of Residential Hard Money Lending
Most of the lending and underwriting requirements followed by conventional mortgage lenders are based on the guidelines set by the three giant government agencies: FHA, Fannie Mae or Freddie Mac. As a overwhelming majority of the home loan originating companies don’t hold the loans they originate and sell to one of the GSEs, they have little or no discretionary approval power to accommodate any unconventional situations unlike their residential hard money counterparts.
The activities of Residential property investors usually involve buying properties that might not be in a suitable condition for living or occupancy. The properties might need repairs, structural changes, cosmetic touches or new additions. In such situations where the property is less than fit to qualify for a traditional loan, the only option is to approach a residential hard money lender for acquisition funding.
Hard money funds are sourced either from the lender’s own funds or of the private money investors who invested in it. The lender or the investors backing it, expect to recoup their principal intact while also earning a good return.
Due to the unconventional nature of the deals they finance, a hard money lender faces the considerable possibility of suffering a huge loss when a loan ends up in default. The foreclosure proceedings followed in many states are quite drawn out and are usually expensive. The lender has to also deal with the loss of interest income and principal repayment. In order to protect their capital, residential hard money lenders usually only lend out on properties that have significant equity based on either the as-is current market value of the property or the ARV (After Repair Value). LTV or Loan-to-Value is a critical factor that determines the eligible loan amount based on the property’s value. Most lenders who provide residential hard money restrict this to 60-70%. This equity room is expected to cushion any losses that may rise out of investor’s default.
Homeowner’s Facing Foreclosure Auction
Homeowners who are behind on their mortgage payments because of temporary financial difficulties may also end up in foreclosure, even if they have very low loan balance compared to the property’s market value. Such borrowers with substantial equity facing foreclosure proceedings can approach a local residential hard money lender to seek a loan to pay off the mortgage in default, while also buying time to resolve their financial situation.
Eligible Properties for residential hard money Loans
All residential zoned properties such as single-family homes, Mixed-use properties, condos, multi-family homes that have two-units, three-units or four-units are eligible for financing. As explained already, these lenders expect to see their funds paid back in full, within a year or less. Investors need to explain their project execution and business plan. Lenders expect the hard money borrowers to chart out a clear course of action for their project since acquisition/financing to the loan-repayment or payoff through a sale or refinance.
Residential Rehab Real Estate Investor Qualifications and Requirements
Good credit history with documentable sources of income and assets is a must for getting a residential home loan from conventional lenders. These guidelines have become even more stringent and restrictive since the financial crisis and real estate meltdown over the recent years. At the same time, a overwhelming inventory of residential homes is piling up at the nation’s banks. Investors keen to purchase these foreclosed or REO properties which are available at a substantial discount to even their fair conservative price estimate are increasingly relying on residential rehab loans from hard money lending sources.
Even though credit, income and asset are considered in evaluating a borrower’s eligibility for a loan, a rehab lender will place more weight on the property’s equity position and also on the investor’s previous experience in executing similar real estate projects. An investor shut out of real estate investing due to conventional lending restrictions can seek hard money financing to engage in real estate investment.
Finding the Right Hard Money Lender
Your success as a real estate investor, for the most part, will depend on your ability to establish and sustain good working relationships with reputable, reliable and reasonable residential hard money lenders lending in the areas where you engage in real estate investment activity. A majority of the hard money investors are themselves active real estate investors which allows them to quickly grasp and keenly understand all the details, specifics and complexities associated with your residential real estate transaction.
To find a good lender, try to first seek references from other investors in your area. If that doesn’t turn up a suitable lender for your scenario, browse through the hard money lender directory on this site.
It will serve investors well to remember that a good residential hard money lender is an essential and critical partner for a rewarding residential rehab investing career, long-term and short-term.