The reason real estate investors choose to use hard money loans is that they provide a means to purchase and rehab property and make a substantial profit that they may not have without the use of this expensive money. The hard money loans are expensive and even if they were legal for a home owner to borrow from the private lenders offering these loans it would never be advisable. So how hard are these private loans you should ask? The answer is threefold. They are restrictive in loan to value, they are high in rate and high in fees.

Restrictive in Loan to Value.

The maximum loan to value for many hard money loans range from 50% to 70%. No deals are done at the higher loan to value for two reasons. First the hard money lender requires lots of equity in case of default they can list and sell the property quickly because they will in theory be below market value. The reason I say in theory is because there are so many REO’s, Short Sales and foreclosure properties on the market today that what was normally considered an exceptional deal is common place. For that reason The private lenders are more particular about the properties and loans they choose to fund.

Secondly, any real estate investment that has less than 30% equity are not good investments for the investors unless they are purchasing the property for the cash flow. In that case they are long term investments and not suitable for the short term nature of these expensive bridge loans.

High Interest Rates.

Whether you are an investor buying and or rehabbing commercial or residential investor properties the rates are substantially higher than they would be for conventional commercial or residential lending. The rates are higher because the risks are higher. The risks are higher because these loans are not underwritten based on the standard conventional guidelines and there is a very limited or no secondary market for private bridge loans. This is generally not an issue because the borrowers know these are only short term loans. The terms range typically from 3 to 24 months. Therefore, the higher interest rate is of minimum importance because both lenders and borrowers know that the borrowers have an exit strategy to quickly payoff these high interest rate loans. Many lenders require a viable exit strategy before they make the loans.

Higher Points.

Because these loans are short term in nature the hard money lenders always charge discount points. They typically charge 4 to 6 discount points. In addition the private money brokers will charge 2 to 5 points. So on average a borrower is paying 8 to 10 points. Plus closing costs. These are high fees. They only make sense when an real estate investor will make substantially more money and they have no other way to fund the deals.

Why Use Hard Money Lenders.

Simply to make money. As a real estate investor you have choices in financing your deals. You can choose conventional financing that requires at 30% to 35% down payment for properties that are in good shape. There are many other conventional requirements including credit, cash reserves and the current value of the property versus the after rehab value of the property. These all make conventional financing almost impossible.

The other option is to use your own funds and not finance a deal at all. But, most astute real estate investors know that if they can make a net profit of $25,000, $50,000, $100,000 or more using a hard money loan they do not like the fees but they we pay them versus not making any money because of lack of financing.

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Hard Money loans are a great way for real estate investors to take advantage of a market where there is an abundance of opportunities for them. Short sales, Foreclosures, REO’s, Rehab commercial and residential investment properties are available for never before seen deep discounts. As a real estate investor now is the time to be in the game and buy as much as you can. But there is a misconception that even though hard money lenders are focused on the collateral that they will do any loan regardless of credit, income,or character.

Collateral is King.

Yes, the main determining factor is not credit, verifiable income, or assets like in a conventional loan. For hard money lenders the Collateral is king. This means that if the collateral is good then there is a good chance for them to do the deal. The misconception is that the collateral is the only thing. No they are not credit score driven, but if you submit a credit report that shows you do not pay anyone the hard money lenders are likely to pass. No they are not income drive. But if you show no ability or history to repay a loan they are likely to pass. If you have no assets, no verifiable income and terrible credit, Hard Money Lenders will still pass on the deal even if the collateral is good with a low loan to value.

Other Factors in Qualifying for a Hard Money Loan.

Because these are private investors they are not blind and they all set their own criteria. The key is that they are comfortable that the borrower will do what they say they will doe (like rehab the home in 30 to 60 days) and pay them back. Therefore a positive track record as a real estate investor and or a good team including Realtor, contractor and loan consultant are all important to them. It is also of utmost important to have a viable exit strategy. It is not good enough to say you will refinance the property if by looking at your credit profile you will not qualify for a refinance loan. Likewise it is not good enough to say you will sell the property if you do not have pre-approved buyers (more than one) waiting to purchase the property.

Hard Money Loans Guidelines.

So we know that the collateral is king and the borrower does not have to meet conventional guidelines to qualify, but there the bridge money investors look at a complete profile and it is important for we are pretty sure you will qualify before you or I invest a lot of time and energy in submitting a deal that has no merit.

Another Misconception About Hard Money Loans.

Some people believe hard money lenders ultimately want you to fail so they can get the property. Truthfully that is not why they are in the business. Just like banks do not want to own REO’s private investors who make bridge loans do not want to own your properties. The reason the offer such low loan to values is if they do need to get involved they can sell them quickly to replenish their funds and do what they do, lend money.

So do not be misled. You must be able to deliver what you said and show that you can quickly take the private lender out of the transaction if you want to take advantage of the market to day using hard money loans. I can help you package your deals so you could qualify.

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