As a private investor, you may need an alternative mode of financing to get loans that are suited for your needs. The primary goal of Money Lender Loans is to help you to get the best financing option for your upcoming project. We've been serving people and organizations in Orange County, CA searching for various funding solutions. In this article, we will share important details about hard money loans to help you make an informed decision.
Hard Money Loans Explained
California has many investors seeking to invest in the state’s lucrative real estate industry. Because our state is well-known for its magnificent natural environments, a flourishing economy and a favorable climate, many investors consider it as a good place for real estate developments. Metropolitan regions with a higher demand for real estate comprise of San Diego, Los Angeles, and San Francisco.
Venturing into the real estate industry in California is a lucrative venture, but you must have good working capital. However, the majority of investors don’t have adequate working capital. Hard money loans are the best solution when you need quick cash to handle real estate transactions. It is a short term loan whose terms are based on the value of the real estate used as security.
Hard money loan is one of the numerous short-term financing options you utilize as a real estate investor to get instant cash for the smooth running of your business. They are accessible as working capital secured from lenders to do some repairs on your apartment. Unlike other types of financing, our hard money loans have unique requirements that you must understand before obtaining the loan.
Many people think that they must have lots of money to run a successful real estate company. The truth is that you have numerous financing options where you can get the financial help required to run your business well. Since the way of securing a loan will affect your business’ outcome, you need to determine how you intend to use the loan.
Note that a hard money loan comes with some pros and cons. The approach implemented using this financing solution relies on the purpose and your security. If you’re a novice in the real estate development area, you need to bear in mind that all funding solutions are designed equal. For this reason, some might work while others might not work. So, the trick is to know which hard money loan will fit your business plan.
Things to do While Securing a Hard Money Loan
Taking time to research various types of hard money loans available in the market is essential. The approach will assist broaden your views on financing options and offer you the required information on ways to utilize them in your advantage. Bear in mind that investors have faced numerous funding hurdles at some point while running their business. If you are unsure about your borrowing tactics, consult professionals to get advice.
How to Qualify for a Hard Money Loan
Hard money loan is based on the security you provide instead of the creditworthiness. This means that your credit rating is not considered when we evaluate the loan requests. In most cases, the total value of the security is not utilized. Instead, we will calculate a loan to value ratio for the hard money loans that represent the security’s value. If the security you provide for the hard money is not enough to obtain a loan, you might be required to give up your personal property to obtain the loan.
Hard money loans are designed for real estate investors who need fast funding for their fix and flip projects. These financing options have a 6-12 month duration and usually can’t be extended to over a 5-year duration. The loan can either be paid in the form of interest-only or interest and principle. At Money Lender Loans, we provide a 12-month hard money loan with terms based on the real estate’s experience level.
Why Use a Hard Money Loan?
Real estate investors decide on using hard money loans for various reasons. The primary reason is that we fund the hard money loan fast. In many cases, the loan is financed within seven days. The application procedure for a hard money loan takes less than 48 hours, and the loan request can be accepted the same day.
The chance to get financing at a faster rate than a traditional loan is a significant benefit for an investor. Particularly when the investor wants to purchase a property with numerous competing bids, a fast close using hard money loan will capture the seller’s attention.
Another reason a real estate investor will go for a hard money loan is that banks have declined their traditional loan request. In most cases, life won’t go as expected since things like short sales, foreclosure and credit issues may prevent you from getting a conventional loan. Banks will also look at income history when evaluating the loan request. If a potential investor started working recently, the bank might reject the loan request because of the insufficient income history. The good thing with our hard money loans is that we can finance you as long as the loan is paid back, giving you sufficient equity for real estate development.
Hard money loans have numerous benefits. Here are some of the instances when a bridge loan is an ideal alternative to conventional financing alternatives.
- You have a real estate project in hand, and you don’t have enough time to follow the lengthy and cumbersome traditional loan process
- Your credit rating is not good enough, and your income history doesn’t meet the requirements for obtaining traditional loans
- You don’t have sufficient cash for the project
- You plan to fix and flop developments and require instant access to funding
- You don’t have sufficient working capital to cover the rehab expenses of the property you intend to flip
What are Hard Money Loan Requirements?
A majority of real estate investors who haven’t used hard money loans before don’t know what is needed to qualify for a hard money loan. These loans have few prerequisites when compared to conventional loans. Since the loans are asset-based, we are concerned with the value of the security and the borrower’s equity in the property.
Additionally, hard money lenders will need the property investor to be strong financially and have the required cash serve to remit the monthly loan payments. Here are some of the requirements.
Down Payment
The essential requirement for securing a hard money loan is having the required equity in the property to act as security for the loan. The minimum amount ranges from 30-40% for commercial properties and 25-20% for residential properties. In some cases, the property investor might use several properties to obtain one loan. Note that a hard money loan with substantial equity will have a better chance of being accepted than the one with minimum or small equity.
General Financial Strength or Cash Reserves
Another important requirement for a hard money loan is having enough cash reserve to make the repayments every month and other holding expenses. Holding expenses might comprise insurance, HOA payments, taxes or any other any transactions that must be handled while the investor owns the asset. The larger the amount of cash reserve the investor has, the better the chances the loan request will be accepted.
A real estate investor without enough cash reserve might experience difficulties when securing a hard money loan. However, hard money lenders might choose to increase the amount of the funds and retain borrower’s finances cover taxes, loan payments, insurance, and other holding expenses. So, the investor will still obtain the loan and the lender will be guaranteed that the required payments will be made.
Exit Plan or Vast Experience in Real Estate
Hard money lenders will need to know the investor’s experience in real estate. A person who has been in the real estate industry for 20 years will have an easy time getting a hard money loan compared to an investor who wants to finance their first project.
For investors with little or no experience, the lender will need to know the information about the property and project. The assumptions created by the investor should be realistic and include an exit plan for the property.
Common Types of Hard Money Loans
Bridge Loans
These types of loans help investors who want to sell one property as they buy another property. Whenever there is a gap in time, implying the first property is sold, but the other one must be purchased immediately, the bridge loan will cover the expenses of down payment and other instant needs. The loan is repaid once the first property gets a buyer. Since there is no assurance that the first property will sell fast, this type of loan is risky to the lender.
Nevertheless, this form of financing allows you to buy a second property by creating a contingency clause. This means that the second purchase will not wait until the first property sells. However, bear in mind that a bridge loan is intended for everyone since the buyer must be approved to own two properties at one time. In some cases, the investor can hold one set of payment if the property sale is pending. Bridge loans are ideal for those people who intend to move quickly.
New Construction Loans
These are short-term financing solutions designed to assist in bridging the time gap required to acquire a new home. The moment the investor makes a plan with the construction company, they will agree on a new construction loan for the construction to commence. Once the property is completed and the investor assumes possession, they will move, and the loan will be changed to a hard money loan.
Hard Money Refinance Loans
These form of loan requires the real estate investor to refinance their mortgage using hard money loans, and they increase the principle so that they can take some money out of the deal. Typically, real estate investors will use this loan when they want to repair or upgrade their property and need some funds to do it. However, the investor must have certain properties to offer as security.
Criteria to Qualify Hard Money Loans
Whenever an investor requires quick funding to take advantage of a lucrative opportunity in the real estate, hard money lenders are the best options to consider. The key benefit of hard money lenders in California is that they are quick to transfer your cash. However, you need to meet their hard money loan requirements to be sure you will repay the loan.
Some of the requirements include:
Tax Returns
While the investor’s credit rating won't detect whether or not they will get a hard money loan in California, the lender will need to see the last two years of tax returns to determine the income. For instance, if an investor wants a loan of $800000, but the returns indicate an income that can’t service the loan, this will be a determining factor for the creditor whether or not to give the loan.
Personal Financial Statement
Most hard money lenders will look at the debt to revenue ratio of the investor. This means that all your current debts will be compared to your income to know if you will have the potential to pay the loan as required. While the hard money lenders tend to be less strict than traditional banks in their underwriting procedure, they still need to make sure that the loan is secure.
The Resale Value of the Property
This is an essential factor that will impact the lender’s decision. The property must have a resale value that will let it earn an income and pay to back the loan amount. It's unknown whether the property will net a profit, the lender might not grant the loan. The majority of lenders will need a first lien position. Essentially, this means that you assure the creditor that the cash will be repaid first once the property is sold.
Experience
As an investor, having a vast flipping experience is essential. It will help the hard money lender feel confident in your prowess to manage the project effectively and get in and out of the investment with a short time. While a proven and lucrative track record isn’t a concrete requirement for the loan to be approved, it does help. A prosperous string of flips will put the real estate in an excellent position to negotiate the hard money loan terms.
Organization
The private lender will know if you come organized with a perfectly-organized hard money loan package. The package must comprise your LLC organizational files, the purchase agreement if the investment, the plan of the intended project and draw schedules. If the hard money leader finds out that you are prepared about the project, they will be confident that you will repay the loan on time.
What is the Difference between Hard Money Loans and other Funding Solutions?
Funding your ongoing or future real estate development might trigger feelings of nervousness if you don’t know which funding solution to use. Apart from hard money loans, self-directed IRA accounts, seller-financing, and cash financing might help in this situation. Nevertheless, these financing solutions don’t match the perks offered by hard money loans as illustrated here:
Self-Directed Internal Revenue Accounts
A self-directed IRA offers you extra freedom over your investment choices in areas like real estate, precious metal, partnerships, and stocks. The Internal Revenue Service (IRS) will let you transfer your retirement cash to purchase real estate properties, both residential and commercial. You can also use the self-directed IRA to expand your portfolio and increase your working capital. Additionally, investors have more control when investing as it lets you determine where and how the cash should be invested.
Seller Financing
This form of funding lets you make an equally favorable agreement with the seller you choose. If you use this option, you will make direct payments to the seller instead of involving the bank. That strategy might influence the broker to give out the property quickly. Additionally, you won’t have to meet the requirements like minimum credit score set by creditors.
Cash Financing
This allows you save on interest, get instant equity in your investment and improve your business cash flow. You will also save on the buying amount of a specific property. Nevertheless, you need to have enough capital to reap the perks of this funding solution. You can as well get a hard money lender if you have insufficient cash.
Obtain a Hard Money Loan from a Reliable Lender Near Me
The primary factor to getting the best creditor for hard money loan is knowing various forms of hard money loans and creditors. At Money Lender Loans, we’re reliable for helping investors obtain the funding they require. However, the investors must meet the terms and conditions, interest rates and repayment terms. We’ve been in the real estate lending realm for many years. So, we have the required experience to help our current and potential clients in Orange County, California. Contact our hard money lender now at 949-409-4372 to apply for a hard money loan.
