The Ultimate Guide to Hard Money Lending

When it comes to borrowing money for your next real estate acquisition, where should you turn? There are many benefits to working with traditional mortgage lenders, however in many cases the lending parameters of traditional banks are such that they can’t fund real estate acquisitions for many people.

Traditional mortgage lenders are limited by loan approval parameters such as:

  • A borrower’s credit score
  • A borrower’s credit history
  • The type of property for which the loan is intended
  • Appraisals are required and then must be reviewed
  • extensive and thorough underwriting

The lending limits of traditional mortgage banking institutions leave many people’s real estate ownership aspirations unrealized, however there is another way for people to get the money they need for purchasing real estate property.

What is Hard Money Lending?

Hard money loans are funded by private investors or investing companies (as opposed to banks) and are generally short-term loans that range in term from 6 months to 5 years, depending on the specific situation and individual lending company.

In many cases, these types of loans require interest-only payments and have a balloon payment due at the end of the specified term.

Are Hard Money Lenders Trustworthy?

As with any business, there are reputable as well as non-reputable hard money lenders. When deciding on which hard money lending company to use, it’s important to research the businesses thoroughly to be sure that a hard money lending company is professional and knowledgeable.

Questions to Ask

How Long Have They Been in Business?

It’s important, when evaluating hard money lending companies, that you choose a company that has substantial experience in the real estate and lending business. By choosing an established hard money lending company, you can be sure that the company will be able to structure a real estate loan to meet your financing needs and will be there to assist you with your real estate loan now and in the future.

What Types of Loans Has the Company Funded?

A reputable hard money lender will be open about the types of loans they’ve funded. Seek a lender that funds loan amounts and property types that are similar to the kind of property you are looking to acquire.

What is the Company’s Reputation?

A visit to the Better Business Bureau and conversations with members of your local real estate community will help you to ensure that the hard money lending company you’re considering does what they say they will do.

What Type of Experience does the Company’s Current Leadership Team Possess?

It’s important, when borrowing money from a hard money lending company, that you choose a company that has experienced leadership and proven knowledge in the real estate lending business. By choosing a lending company with experienced leaders, you can be assured that every option to fund your loan will be considered.

How Can Hard Money Lenders Avoid the Strict Guidelines of Traditional Lenders?

Because conventional mortgage lenders are most often funded by government sponsored lending, their loan approval guidelines must be approved by the government sponsored lending institution they are backed by.

Hard money loans are funded by private investors or investing companies (as opposed to banks) that pool investors’ monies together to help fund loans that traditional banks often cannot approve.

Because the funds for hard money loans come from private investors and private funding companies, the lending guidelines can therefore be determined independently by the hard money lender as its management deems acceptable.

Are There Different Types of Hard Money Lenders?

Under the umbrella of hard money lending, there exists two main types of lenders. Below is a summary of the two main types of hard money lenders.

Brokers

Hard money lending brokers act as an administrator between investors and hard money lending clients. A broker organizes the consolidation of available funds from investors, assesses and analyzes potential borrowers and their proposed collateral, oversees distribution of lending funds, and at times services loans as well.

Direct Lenders

Whereas brokers provide the service of partnering private investors with borrowers, direct lenders offer their own money to potential borrowers. This “hands on” lending approach not only provides more flexibility, but is often cheaper and creates an environment for long-term business relationships between lenders and borrowers.

What Types of Properties Can Be Purchased Using Hard Money Lending?

Each hard money lending company has different parameters regarding what types of property they will lend money for. Here are some of the more common types of property that hard money lenders will fund.

Commercial Property

Commercial property can include an office building, hotel, retail building, industrial building, etc, whether occupied or vacant.

Non-Owner Occupied Homes

Clients looking to enter into the real estate investment business through traditional lending avenues will often find that high down payments, low debt-to-income ratios and pristine credit records are often required, along with stringent underwriting that slows down the funding time.

Hard money lenders can help clients close on single family homes by using flexible lending standards with which to approve loans and by funding loans much faster than traditional lending sources can.

Land Loans

Many hard money lenders also fund land loans. Many traditional lending sources won’t finance land, however hard money lenders can provide financing for your real estate land purchase.

What Types of Mortgage Loans do Hard Money Lenders Generally Finance?

There are several types of loans that hard money lenders generally provide. Four of the most common loan types are listed below.

Purchase Loans

Purchase loans used to fund the acquisition of real estate.

Refinance Loans

Refinance loans allow the borrower to pay-off their existing debt with a new hard money loan.

Cash-out Loans

Cash-out loans can be used to either a) pay-off existing debt and get additional money for your business use, or b) if a property is owned free-and-clear of debt, it can be used to provide working capital for the existing property or another business.

What Size Loan Can I Get?

All hard money lenders vary in terms of what size loans they will fund. Some lenders will finance for as low as $50,000 while some might average loans in excess of $20 million.

What Loan-to-Value Ratio is Acceptable?

The “loan-to-value” ratio on a property is the amount of money owed on the property compared to the value of the property. For example, a property with a $1 million value and a loan of $650,000 has a 65% loan-to-value or LTV ratio. Most hard money lenders accept loan-to-values of up to 75 percent on income producing properties and closer to 50% on land.

What Loan Term Can I Expect?

Hard money lenders generally fund “bridge loans” loans for terms of 3 years or less, and on occasion will fund a loan with a term of up to 5 years. A bridge loan is a short-term loan which enables the property owner/buyer to get from one stage to another.  For example, to get from quickly acquiring an asset to refinancing with a traditional source, or from acquisition to sale, or from acquisition as a vacant building to refinancing as an occupied building, etc.  The payment schedules on hard money loans are typically interest only.

What About Interest Rates, Points and Payments?

Because of the ease and convenience of obtaining a hard money loan, along with the higher risk liability to the hard money lending company, the interest rates on hard money loans are generally higher than on traditional loans.

Typical hard money financing ranges between 8% and 16%, with fees between 1% and 4%.  Hard money is typically paid monthly via interest only payments with the principal due at loan maturity.  INCA Capital hard money loan rates range from 8% for income-producing properties to 10.75% for non-income producing properties, with typical fees due of 2.75% for 12 months and 1.75% for 6 months.

While the rate of a hard money loan is higher than what is typical for traditional lending, it is cheaper than equity.  Thus using hard money debt for leverage can provide more return to the managers than closing a transaction with all equity.

Who Can Benefit from Using a Hard Money Lender?

Often, borrowers need speed and certainty of execution when it comes to closing a real estate acquisition. In other cases, their traditional bank has rejected their loan request or is calling their loan due and unable to extend the loan financing.

Hard Money loans are more expensive than traditional bank financing, however get approved and funded faster and allow for flexibility in loan approval guidelines, where most banks are unable to make accommodations due to federal oversight and regulations. Check here to see if a hard money loan is the best option for you.

What Types of Questions Should I Expect?

Our underwriters will ask you for the following information when you apply for a loan with INCA Capital.

Borrower:

  • Name, address and other personal information about the borrower.
  • Current employment situation and income.
  • What is their experience? Do they have real estate experience?

Collateral:

  • Where is the real estate located?
  • What type of real estate is it?
  • What are the real estate specifics (square feet, number of offices, zoning, platting, etc.)?
  • What is your plan with the real estate?
  • What is the cost of the real estate?
  • What is the value of the real estate?
  • How much income does the real estate generate?
  • What is your financial pro forma?

Terms:

  • What loan amount is requested?
  • What loan terms are requested?
  • What is the use of loan funds?
  • When is the money needed?
  • Where is the equity for the loan closing coming from?
  • How does our loan get paid off?

These questions will help us to structure a loan that will fit your borrowing needs.

As you can see, hard money lenders have much to offer to real estate buyers. Quality hard money lending companies can provide an alternative for real estate financing where traditional banks often cannot. If you are seeking financing for your next real estate transaction, find out more about the loan process here or contact INCA Capital, the premier hard money lender in the southwestern United States, at 480-947-5900.