A hard money loan is a form of asset-based financing; a borrower acquires funds secured by real estate. Hard money commercial loan is a short term loan that extends to several months or several years, although the loan period may extend to 2-5 years. The loans are funded by investors or private investors, unlike conventional loans usually provided by credit unions or banks. Typically, a hard money commercial loan is repayable in monthly installments of interest only or interest and a small portion of the principal amount with a balloon payment payable at the end of the loan term. If you are looking for easy to access hard money commercial loans in Orange County, Money Lender Loans is ready to help you.
A Brief History and General Overview of Hard Money Loans
The term hard money is exclusively used in the United States and Canada; this is where hard money commercial loans are the most common. The hard money commercial loans serve as an alternative to last-resort loans and come in handy for property owners seeking finances against their properties. In the 1950s, when the credit industry in the United States underwent some drastic changes, hard money loans came into effect.
There was a mortgage crisis in the United States in 2009, and this saw the passing of the Dodd-Frank Act. Since the passing of the act, hard money lending has greatly expanded. The expansion is due to the strict rules the act imposes on banks and other lenders, making mortgage or loans borrowed against real estate hard to qualify for.
According to the Dodd-Frank act, mortgage originators, brokers, and lenders have to follow some strict guidelines in determining a borrower’s ability to repay loans borrowed against primary residences. Failure to follow the act’s guidelines may attract huge penalties for noncompliance. Most hard money lenders avoid loans that fall within the Dodd-Frank guidelines and instead focus on commercial loans.
Qualification for Hard Money Loans
The amount of hard money loan you qualify for depends on the value of property used as collateral. Hard money lenders are more interested in collateral value than the creditworthiness of the borrower; however, the creditworthiness of the borrower counts at some level. The collateral may consist of a property that the borrower already owns and wishes to use as collateral. The collateral may also be the property a borrower intends to acquire using the hard money commercial loan.
If you are unable to access conventional financing due to a short sale or a recent foreclosure, you can still access a commercial hard money loan. When your bank says no, the hard money lenders say yes. This is as long as you have enough equity in the property you intend to use as collateral.
You can borrow a hard money commercial loan against any property. Properties that commonly serve as collateral include industrial and industrial properties. You may also use a single or multi-family residential property or even land as collateral. Some hard money loan lenders may specialize in a certain property as collateral, especially if they have no experience using other forms of collateral. For instance, a lender may concentrate on residential property collateral as opposed to land. It is always wise to find out the collateral niche a hard money lender focuses on.
When using the owner-occupied residential property as collateral, some additional rules may apply. Therefore, some lenders may avoid using the owner-occupied residential property as collateral to avoid the additional requirements. However, some other lenders are willing to embrace the extra paperwork and give loans against owner-occupied residential property as collateral.
Loan-to-Value (LTV) Ratio
In determining the amount of hard money loan to lend, lenders calculate the loan-to-value ratio. This is obtained by dividing the loan amount by the value of the property. In most cases, hard money lenders will offer 65-75% of the current value of the property. When financing 100% of rehab costs, some money lenders may require a down payment of 10 to 15 percent. An alternative method is funding based on the ARV (After Repair Value) of a property. For instance, lenders may lend at an ARV of 70%. After Repair Value refers to the value or property after a renovation or repair. For instance, if the after the ARV of a property is $300,000, and it needs repair worth $30,000, a lender may finance up to $ 180,000 under the 70 percent rule ($300,000 *70%= $210,000-$30,000= $180,000).
In determining the value of a property for purposes of calculating the LTV of a property, hard money lenders may rely on broker price opinion (BPO). The lenders may also have a licensed appraiser conduct an independent appraisal to determine the value of a property.
Hard Money Commercial Loans Deals
Which deals can you finance using hard money commercial loans? As much as hard money loans are easy to access, they may not be suitable for all types of deals. For instance, it may not be wise to secure a hard money loan when purchasing a residential property, especially if you are not facing issues like foreclosure or short sales. You may also opt for conventional financing as opposed to hard money loans if you have a good credit history and if you have some time to follow the conventional financing method.
A hard money commercial loan is an ideal option if you cannot qualify for a conventional loan. A hard money loan is also a good option if you need money within a short period. Some of the deals that you can finance using hard money loans include fix and flips, land purchase loans, or construction loans.
Fix and flips involve acquiring a property, renovating it, and then flipping /selling it at a profit. If you are planning to acquire, renovate, and then sell a property in less than one year, you may consider acquiring a hard money loan. Being able to pay off a hard money loan quickly after selling a property may save you from incurring hefty interest rates. Financing for flipping properties offers investors fast closings for properties in any physical condition.
Why Acquire a Hard Money Commercial Loan?
The popularity of hard money commercial loans continues to rise as more and more people embrace the concept of hard money loans. Many people, especially real estate investors, prefer hard money financing over conventional financing. Some of the leading benefits of hard money commercial loans include the following.
Quick Access of Money
It may take you between 35-40 days to complete the loan application process for conventional loans and finally, access funding. If you opt for a hard money commercial loan, you may access the funds in a shorter period; you may get the money in one week! The main reason why most borrowers prefer hard money financing to traditional financing is quick access to funds. In some instances, the application for hard money loans may take two days or less. It is not uncommon to have your hard money loan approved the same day you apply! You cannot access a conventional loan in a short period as hard money loans.
If you are trying to acquire a property with many competing bids, a hard money loan may help you secure the property against your competitors. Your ability to access funds quickly will earn you the attention of the seller. It will also differentiate you from other buyers who may be relying on conventional financing.
Easy to Acquire
Compared to conventional financing, it is easier to qualify for a hard money commercial loan. After banks and other lenders have rejected you, you may still be eligible for a hard money loan. Before advancing a loan, most banks consider the credit history of the borrower. Therefore, if you are undergoing a financial crisis, it may be easier to obtain a hard money loan compared to conventional loans. At times, banks may deny loans to new borrowers due to insufficient income history even when the borrower can repay the loan. However, as long as you have enough equity invested in your property, hard money lenders look past the issues that conventional lenders hold so dear.
It is no secret that acquiring a loan from conventional lenders can be a cumbersome process. A hard money lender will not burden you with so many requirements. As long as your property has adequate equity, chances are pretty high that you will qualify for a hard money loan.
No Income Verification
Hard money lenders do not follow long procedures of verifying your income or reviewing your bank statements. Hard money lenders may advance you the funds without verifying your income or cash flow. Instead, the lenders will rely on the value of the collateral you are offering. The lenders will also compute the loan to value ratio (LTV) or the after repair value (ARV) while determining the loan amount to lend to you.
Unlike conventional loans, hard money loans offer a flexible repayment method. Many hard money lenders give you the freedom to create a customized loan repayment plan; it is hard to get this freedom in a conventional bank. Private lenders are always willing to listen, and together, you can craft a repayment mode with which you are most comfortable.
No Prepayment Penalties
If you pay off your loan before the maturity date, some conventional lenders may inflict some prepayment penalties. This is not the case with private hard money lenders. You can always pay off your loan before the due date without the risk of prepayment history. It is for this reason that fix and flip investors use hard money loans and quickly repay off the loans after making some quick profits.
Ideal for Projects that Other Lenders Dismiss
With hard money loans, you can access funding for projects that other lenders cannot finance. Conventional lenders, including banks, are extremely risk-averse and tend to avoid risky projects. For instance, banks may be hesitant to finance you to purchase a faulty property even if you intend to fix and flip the property. The typical 12-month fix and flip loans may not fit into the banks’ business models. A hard money lender would be willing to fund you to acquire a property, repair it, and then resell the property to repay the hard money loan and keep the profits.
Shortcomings of Hard Money Commercial Loans
Despite the numerous benefits of acquiring a hard money commercial loan, there is also a downside. Other than the benefits, it is also important to understand the shortcomings of hard money loans as this helps you make the right borrowing decision. Some of the disadvantages of hard money loans include:
Higher Interest Rates than Conventional Loans
Due to the increased risk for the lender and the enhanced convenience for the borrower, hard money loans have higher interest rates than conventional loans. Interest rates for hard money loans may vary from one lender to the other. The rates may range between 9-15% though some lenders may offer lower rates. In addition to interest rates, hard money lenders charge an extra cost known as points. This is a loan origination fee expressed as a percentage of the loan; the charge may range from 2 to 4 percent, although some lenders may charge much higher points depending on the specific circumstances of the borrower.
Areas that have many competing money lenders enjoy lower interest rates as lenders lower their lending rates to attract borrowers. It is always advisable to compare interest rates from different money lenders before finally settling for one lender.
Some money lenders offer 2nd trust deeds or mortgages on properties. These lenders may charge higher rates for 2nd borrowings than 1st borrowings. The increase in interest rates is due to the increase in risk on the lender’s side as the lender will be in the second position rather than the first. If the borrower defaults, the 1st holder can foreclose on the property and the hard money lender, being in 2nd position, would suffer some great losses.
Suitable for Short Term Use
Most hard money loans are short-term loans with repayment periods of up to 12 months. In some instances, the loans may have a longer repayment period ranging from 3-5 years though this is a rare occurrence.
For a long-term loan, a borrower has an advantage; if the rates drop, the borrower can refinance to the current lower interest rates. This would pose a risk to the money lenders as their profits would go down if borrowers refinance to lower interest rates. Therefore, hard money loan lenders rarely offer longer repayment periods like conventional loans.
Conventional lenders offer longer loan repayment periods as they can regulate the risks involved. For instance, banks deal with the uncertainty of longer loan repayment periods by offering lower interest rates for short loan terms and higher interest rates for longer loan repayment periods. For instance, if you acquire a 30-year fully amortized loan, you will pay a higher loan interest than for a 15-year fully amortized loan.
Down Payment or Equity Required
Although hard money lenders look past many issues and shortcomings of borrowers, they require the borrower to pay a down payment or to have adequate equity, which serves as security for the loan. Unlike banks that focus on income and credit report of a borrower, hard money loans lenders focus on equity; if there is no equity means, no loan. Without sufficient down payment or equity, hard money loans would be very costly for the lender.
The minimum down payment for a hard money commercial loan may be as high as 40%. Lenders require a higher down property for commercial hard money loans as it is typically more difficult to resell a commercial property than to resell a residential property. Other than being harder to resell, commercial properties are also harder to value compared to residential properties; commercial properties have fewer data points to work with.
How to Apply for a Hard Money Commercial Loan
When applying for a hard money commercial loan, the process starts with making a simple loan application. In reviewing your application, the lender will determine the value of the property you intend to use as collateral and also the equity available on the property.
For fix and flip projects, the lenders may determine the ARV (After Repair Value) of the property. The lender may review the description of your project, including how you intend to repair a commercial property and then sell it at a profit.
After gathering all the necessary details, the hard money lenders offer you the terms of your loan and an estimate of all the expenses you are likely to incur. If you accept the terms of the hard money loan, the lender may visit and inspect your property before finally closing the deal. The whole application process can be completed in a short period.
In some instances, the hard money commercial loan lender may request proof of income documents. The document may include a property title to prove that you are the real owner of property among other identification details.
Contact a Hard Money Commercial Loan Lender Near Me
If you have tried to acquire a conventional loan without success or if you are seeking a quick source of funds, it may be time to apply for a hard money commercial loan lender. At Money Lender Loans in Orange County, we offer quick hard money commercial loans with minimal qualifying requirements. Contact us at 949-409-4372 and speak to one of our loan experts.