Hard Money FAQ's

What is Hard Money?

 

A hard money loan is a specific type of asset-based financing instrument through which a borrower receives funds secured by the value of a parcel of real estate. Hard money loans are typically issued by private investors or companies. Interest rates are typically higher than conventional commercial or residential property loans because of the higher risk taken by the lender (typically lending on a distressed property). In addition, the lender makes the loan based on the ARV (After Repaired Value)...something a traditional lender would not do.

 

The qualifying criteria for a hard money loan varies widely by lender and loan purpose. Credit scores, income and other conventional lending criteria may be analyzed. However, most hard money lenders primarily qualify a loan amount based on the value of the real estate being collateralized. Typically, the biggest loan one can expect would be between 65% and 70% of the ARV.

 

What are advantages of a hard money lender?

  • A simpler application process and quicker approval/disapproval decision;
  • Less scrutiny of the borrower’s personal financial situation, including income and historical tax returns, compared to bank loans;
  • Borrowers can allocate less time to seeking financing and instead concentrate on other business;
  • Most hard money lenders do not expect perfect credit and substantial amounts of disposable income from borrowers, but instead focus on the merits of the specific deal under consideration;
  • Self-employment is not seen acceptable to private lenders, whereas many banks view self-employment negatively and strongly prefer lending to professionals with very steady income.

 

Can I get a loan if I am a sole proprietor, corporation, partnership, LLC or trust?
 

Yes, however all loans must be personally guaranteed.

 

Why do hard money lenders exist?
 

Hard money lenders exist because many real estate investors need a quick response and quick funding to secure a deal when looking for a real estate loan. Banks and other institutional lenders that offer the lowest interest rates don’t provide the same combination of speed and transparency in their decision making process, along with quick access to capital.

 

Can I finance closing costs and fees?

Normally no and never on the first deal, however once we have established a good working relationship, we can work with you to reduce your out of pocket expenses.

 

When should you use hard money?
 

A borrower might consider using a hard money / private money loan in situations where he or she is willing to pay a higher interest rate and/or higher up-front fees in the interest of gaining access to capital more quickly, dealing with less bureaucracy and more transparency during the application process, and finding capital to pursue an opportunity that banks will not finance, either because they are unwilling or unable to do so

 

Is an appraisal required?

Yes, we require one of our approved appraisers to do an appraisal. We will schedule the appraisal for you and require the appraisal to be paid in advance.

 

Is a survey required?

Yes, we require a survey on every deal.

 

Who funds hard money loans?
 

Hard money loans are typically funded by individuals or by funds that aggregate capital from multiple wealthy investors. Individuals who invest directly into a single loan are known as trust deed investors. Many trust deed investors are real estate investors/owners who invest in “bridge loans” to keep available capital working to generate a higher rate of return, rather than leaving the capital in banks earning minimal interest rates. Investors who prefer to invest passively in a fund are typically not as experienced in real estate investment and choose to pay the fund manager a fee to oversee the process of sourcing, selecting and originating a series of bridge loans.

 

What type of insurance do I have to carry?

At closing, we will require a one year, paid in advance or at closing Builders’ Risk certificate of insurance with a vacancy clause. Also, Windstorm coverage will be required for properties located in Brazoria and Galveston Counties as well as certain locations in East Harris County. Flood Insurance will be required for any property located in the flood zone.

 

How much is the draw inspection and how long does it take?

The draw inspection fee is $100.00. The Draw Request Form must be turned in by Tuesday and checks are cut on Friday of the same week.


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