Hard Money Loans for Investors

Hard Money Loan Qualifications.

Many times investors ask me to send them information on a hard money loan. As a mortgage broker with many programs and options it is hard to tell them exactly what the qualifications are for financing their project. They are many because hard money lenders are private investors. Each private investor makes up their own guidelines. Unlike conventional financing there is no secondary market and there are no quasi government organizations like Fannie Mae or Freddie Mac that establish uniform or conventional guidelines. There are qualifications that each bridge and real estate rehab lender have in common. They are:

1. The property and after rehab value.
2. The exit strategy.
3. The down payment.
4. The investors experience.
5. The investors credit.
6. The investors cash reserves.

The Property.

There was a time and will be again were the property and the after rehab value of the property was the sole consideration of doing a short term loan to a real estate investor. Whether the deal is commercial or residential investment property this remains the most important key to the deal. The reasons it is not the only criteria is that lenders have been burned by the declining value of properties and the excess of properties available. This means that if they have to take the collateral for the short term loan the property has been harder to sell and they get less money for it. Yet the collateral still remains the most important criteria. The lower the loan to value the better the deal. Even though some lenders will go as high as 65 to 70% of the after rehab value those deals are tough when so many are available at or below 50%.

The Exit Strategy.

Almost of equal importance to the collateral to many purchase rehab lenders require a solid verifiable exit strategy. This means if you say you are going to sell it you should have a buyer who is pre-approved and their information needs to be verifiable by the lender. If you say you want to refinance the property then you need to have the income, credit and assets to qualify for a conventional refinance loan. Whatever your exit strategy is it must be verifiable by the lender. This is good for the lender and for you. No one wants to get stuck with a non performing asset.

Down Payment.

Though there are programs that do not require down payment they are fewer than ever. Most purchase rehab lenders require a down payment. For this reason it is good to be prepared to invest 20% to 30% in your projects. Because there are so many projects available yet funds are limited a down payment makes your project easier to fund. Also if you have poor credit assets help.

The Investor.

The credit, assets and experience of the investor plays a role in the qualification process. For a real estate investor qualify the should have good credit, assets and experience. If they do not and are short in any of these areas they need to be stronger in others. Meaning they should have a deal with lower than 50% loan to value, a strong exit strategy and or a down payment. Because each private investor has different criteria, it is hard to say one deal will qualify and another would not based on one criteria or another. But, the first three are the most important. Most deals that the real estate investor has that requires funding will qualify based solely on the after rehab value of the property, the exit strategy and the down payment. Even though there are no down payment deals available you need to be a strong investor to qualify for them.

No Money Down Loans.

Many Real Estate Investors find opportunities to buy property below market value and rehabilitate them to bring them into code and make the property leasable or saleable. In those instances when you can acquire a property below value and increase its value to true market value creating true equity in the property there maybe no money down loans available to you. The conventional residential investor or conventional commercial real estate guidelines require that the borrower and the property qualifies based on convention mortgage guidelines. These guidelines do not allow for these no money down loans for real estate investors.

Hard Money or Bridge Loans.

Hard Money or Bridge loans are generally based on the after rehab value of the property. Lenders for this type of mortgage are usually private investors who make their own guidelines versus having them based on conventional real estate guidelines. One such conventional guideline views the value of the property as the lessor of the purchase price or the appraised value. Furthermore, the appraised value would not be considered as the true market value for financing purposes until it has been seasoned for one year. Seasoning in this case is the length of time the property has had its current ownership. Therefore, the appraised value becomes the market value after it has been owned for one year by its current owner. This seasoning requirement for conventional financing is not an issue with hard money or bridge loan lenders.  By using the after rehab value we create opportunities for no money down loans for real estate investors.

After Rehab Value.

To qualify for these real estate investment opportunities most lenders will lend between fifty per cent to seventy per cent of the after rehab value. The determining factors are different from lender to lender depending on the other loan criteria. If the lender is just looking at the property and does not qualify the borrower then the loan to value would be sixty five per cent or less. When the lender considers the borrower the loan to value may increase to seventy per cent, again based on the lenders criteria.

Finally.

The key to these no money down loans for real estate investors is their costs. These hard money or bridge loans have high fees and high interest rates. They make sense only as short term loans to real estate investors who can sale or refinance them quickly based on the value of a newly renovated property. Who wouldn’t pay higher fees and rates to make a substantial return when they may have to even have a down payment to realize a substantial return on the real estate investment opportunity. A Hard Money Lender can help you meet your real estate investment goals.

Hard Money Loan.

You may have heard of a hard money loan also known as a bridge loan and wonder what it is and why do people use them. The first though in many peoples mind is that a hard money loan is a juice loan. That is not the case. When you deal with legitimate businesses that specialize in making high risk loans to businesses then these are Hard Money Loans.

What Makes It Hard.

Standard conventional underwriting for residential hard money and commercial loans require that you verify income, assets, credit and collateral. A borrower must meet the minimum criteria in each of the categories to qualify for conventional financing, which is generally the best rate and fees because of the lower risk. When a borrower does not meet any of these criteria they no longer qualify for financing and the loan request becomes “hard” to do because of the higher risk.

It is considered “hard” from the borrowers perspective because of the increased cost. All bridge loans have higher rates and higher fees and therefore are short term financing. As a business person these higher rates and fees only make sense when the potential reward or return on investment is high enough to offset them. That is why these loans are only for businesses.

Why Can’t a Homeowner Get a Residential Hard Money Loan?

Hard money loans are for business purposes only. Because of the higher fees and cost they would be a violation of usury laws and predatory lending laws the limit the rate and fees that can be charged on a consumer mortgage. Truly they should not be for the consumer in another sense. Residential Hard money loans are only for investment purposes and though your residence is a personal investment it is primarily your home and not a speculative investment.

Why Would You Use a Hard Money Loan.

As a Real Estate Investor or any investor, what makes an investment worth while is your return on investment. If you meet all the criteria of a conventional residential investment or commercial loan the long term return on investment will always be more favorable. But in the short term many times you will be able to invest less (some times nothing at all) and receive a high return even with higher costs. For example: If you could buy a property for $150,000 and spend $150,000 to totally rehab the property assuming the value would be $600,000 after rehab this is how the returns would compare. Conventional financing may require 30% down payment or $90,000 plus closing cost of $5,000. With a return of 300,000 on your 95,000 investment would be very good at 315%. That same scenario for a hard money loan may cost you 30,000 more but you would have upfront  investment except closing cost of 15,000 (which can often be rolled in the loan) with a return of only $270,000. for a $15,000 investment you would net a 2,000% return on you investment. Which would you prefer to invest $95,000 to earn  $300,000 or $15,000 to earn $270,000. As a matter of fact with the leverage of a bridge loan you can theoretically do 6 projects for the same $95,000 to receive 6 times the return. In reality you would just do a larger project for a larger return.