What is hard money?

Hard money loans come to you when you have nowhere left to go. Their credit scores are abysmally low: below 620; consider the 300-400 range. He has a history of defaulting, late prepayments, missed payments, bankruptcy (amongst his multitude of misdemeanors). No lender would accept it. Those are the worst case scenarios. But you want that house.

Hard money lenders may consider it.

Because?

Because what they are looking for is the value of your property instead of your credit rating or history. Certainly some may count some of that, but at the end of the day the calculation is based on the value of your collateral: how promising it is and whether it will repay the lender’s funds.

Hard money loans range from $20,000 to $150,000, or more, depending on the lender’s funds. Most loans are also limited to 3 to 5 years, although you may find some that offer options for longer terms or later payments. The loans also differ. You’ll find a variety, from commercial to rehab to so-called social loans and personal businesses. These are the most common.

Hard money loans are also called ‘bridge’, ‘direct rehab’ or ‘personal’ loans, as the hard money lender provides you with money that meets your need, whether it’s to repair or buy a home (or related emergencies). ) and he or she loans out of his or her own pocket. The advantages of the hard money scenario are that the process is flexible, fluid, and fast. Lenders set their own terms and hours that generally fit your needs. Little paperwork is completed and it all happens in as little as 7-10 days. The drawbacks largely consist of the high interest rate and low loan-to-value ratio. Hard money lenders must be certified by organizations such as the American Association of Private Lenders (AAPL), through your state regulatory agency, and through the National Mortgage Licensing System (NMLS).

Definitions you may need to know

Bridging Loan: This is a short-term loan to “overlook” the interval between buying one property and selling another. A typical bridging loan is for a short-term loan of 6 months or less, though terms vary.

Rehabilitation Loan: This is a short-term loan made to improve a property to refinance or sell. The borrower shows the lender construction milestones and results as construction progresses; funds (held on escrow) are released accordingly.

Residential loan: This type of loan is to buy a private property, usually one in which you want to live. Consumer protection agencies and federal governments have issued a series of regulations that protect you. More are coming out as I write this.

Commercial loan: to buy a property that you want to repair and change for commercial purposes. These generally carry a higher risk as they are more expensive to purchase and involve years of time-consuming and expensive labor. Banks are more reluctant to support them; hard money lenders are generally nicer as they tend to promise more profit.

How hard money offers work

You will want to develop a business plan that specifies your experience, the promise of the property, and why you believe it is a promising investment. The lender will examine the deal, analyze the properties and qualify it. If he approves you, he will charge you fees plus interest. You’ll be enrolled in a balloon payment schedule, which means you’ll pay slightly larger repayment amounts with a significantly larger payment once your loan reaches maturity. Failure to make this payment means that the lender pockets the collateral from him. You can also choose whether you want to pay back regular monthly payments or pay a lump sum of interest at the end.

The pros and cons of investing in hard money

• Your rate of return is invincible to stock market fluctuations, world politics, or even long-term real estate trends.
• You do not need to purchase or manage the real estate in which you have invested your funds.
• You can get proven, predictable rates without tying up your money for years. (Private investors are generally offered a fixed rate between 6 and 14% annualized at no charge, though terms vary by lender and individual transactions.)
• You have absolute control over your loans. You choose your borrower and investor. You decide whether or not you want to lend to certain customers. You also select your financing partners.

There are also downsides to becoming a bridging loan or hard money investor:

• Research Required: You will need to have an excellent understanding of real estate law and property values ​​to be successful in this enormously risky field. It will be much more worth it to get the services of a proven and reputable company that finds, analyzes and organizes the deals.
• time frame: You will have to reapply for one bridging loan after another (since each one has short-term applicability). Ideally, you’ll work with a company that you can transact a lot with over time.
• Risk: All investments carry risk, but this one is particularly risky, especially if “Murphy” shows up: your income plummets, the market changes, your partner divorces, your child dies, who knows what fate he has in mind for you. Result: lose funds and property.

The conclusion is the following:

Every effort is made to protect the investor’s original investment and, if possible, any interest owed as well. However, it may take longer than anticipated, and the only collateral you have is the equity in the home. While that may sound unsafe, consider these facts to put the risk in perspective.

In shorts…

Bridge loans and other hard money loans can be safe and reliable investments when properly examined and executed. Banks have been running these types of loans for years until it becomes less safe for them. Then private individuals took over. If you want to become a hard money investor, you may want to consider hiring a private lender who will carefully assess your ability to pay and the value of your property. The key is also that you find a trustworthy and transparent lender that is open with you about the terms and sets compelling rates. Also make sure you can pay.