Hard money by its very nature is expensive, but it is a vital part of a real estate investor’s tool kit, and often it is well worth the expense. As an investor your need for cash can quickly exceed your own personal resources. You eventually will need access to cash from other sources. Whether it’s to fund a purchase of a great wholesale deal, the money to finance a fix-and-flip, or funds to buy a rental [which you will quickly refinance at a lower rate later].
When choosing a hard money lender, my advice is to shop around and find a lender you are most comfortable so you build a long term relationship so you can keep coming back. Anticipate that your transaction will be the most expensive, as you both are feeling each other out. As you develop a track record and comfort level this will change, but always remember EVERYTHING IS NEGOTIABLE.
Here are some questions I compiled from different sources, to use when interviewing and deciding on using hard money. Always have an attorney review your documents from a hard money lender.
- What is your process for Hard Money Loans?
Hard Money Loans provide Investors access to capital to purchase investment properties quickly, typically within 72 hours of receiving the final docs from the Title Company. However in case when you are buying properties directly from a government agency, there is no settlement. You send them money and they send you the deed. It’s your job to provide the hard money lender all the documents they need to fund your purchase.
What is the interest rate?
The interest rate depends upon the Lender. The rate will range from 10% interest only to 18% interest only annual interest rate payable monthly in most cases. Some Lenders will defer interest payments to payoff, benefiting investors that do not want payments during rehab.
What Loan-to-Value are Hard Money Lenders looking for?
Typically a loan does not exceed 70% of the after-repaired-value (ARV). This figure is often calculated by an appraiser or other documentation requested by the lender including the repairs.
How long is the loan for?
Typically write the notes from 3 months to 12 months depending on the Lender and your needs. Longer the term can lead to increased costs or interest rate.
What are the costs?
They should at first tell you how many points they charge. Each point is one percent of the total loan amount. So for a $120,000 loan, a 3 point fee would be $3600. They usually call the points an “origination fee.” We usually see hard money lenders charge between one and five points. Then, they should tell you the interest rate. Usually they calculate this as “simple interest” and it can range from 10%-20%. It can be expensive! Be sure to clarify and understand: How do you calculate interest? Remember everything is negotiable.
Can I roll the points of interest into the loan?
Some lenders will allow you to roll the points and interest into the loan so that it is paid when you pay off the loan. The ‘pro’ of this approach is that you may not need to come up with any out-of-pocket cash; the ‘con’ is that you will likely be accruing additional interest costs on the points and the previous month’s interest.
Can I get money pay for repairs?
Yes. Most Lenders require a “Draw Request” form to be filled out to identify the completed repairs to the property, copies of the invoices from the contractors or subcontractors. After work is inspected, draws can be dispersed. Typically work to contractors is not paid in advance. However, if you have no track record with a general contractor they may require ⅓ up front to get started.
Does my credit matter?
Maybe. Hard Money Lender do check credit, not necessary for credit scores, but to check for bankruptcies, foreclosures, charge offs and collections. They look for ability to repay. The loan is more collateral based, which means they look really closely at the property. If you have blemishes be honest with them upfront, and realize you might have to pay a higher rate until you build a track record.
Do I need to put any money down?
In most cases, Yes. Most lenders want to ensure that you have enough resources to finish the repairs and cover the costs of the loan plus any surprises. Expect to pay all origination/discount points and other costs at or before closing. If you cannot afford to close you typically cannot afford to take out this type of loan.
Can interest to be deferred to the end of the loan?
Sometimes. Most have interest payable monthly. Again, if you cannot afford to close you typically cannot afford to take out this type of loan.
How does Hard Money compare to a traditional non-owner occupied investor loan?
This would be like comparing apples to oranges. Hard Money has a very specific purpose. Typically these loans are for quick turn around or after repair situations. Conventional financing is used for your traditional rentals and long term hold scenarios. As the foreclosure market increase you will find investors to use Hard Money as way to secure the property in a short period of time then refinance into Conventional finance.
How long have you been in business?
Look for someone that has been around for 3 years or more. By then, they will certainly know what they are doing
How many loans do you do in a year? How many loans do you have outstanding right now? How are these loans performing?
There are no specific answers you are looking for with these questions, but you are trying to figure out how strong their underwriting is, and more importantly, try to get a feel for the lender’s intent. Some hard money lenders want the people they are lending to, to succeed. They are true win-win partners. Other hard money lenders are looking for those they lend to, to fail. They want to charge late fees, penalties, and in some cases, they want to foreclose on the property. Usually, when you ask how their current loans are performing, you’ll get a feel for their intent.
What is the term (length) of your loan? What is the penalty to extend? Can you extend the loan?
Most hard money loans have a term of 6, 9, or 12 months. If the loan is not paid back in the given timeline, there are penalties.
What is your down-payment or equity requirement?
Some lenders will pay 100% of the costs. Others require some “skin in the game” (some cash from you), to know that you won’t “walk from the deal.”
Do you fund construction? If so, what percentage do you fund?
Some lenders will even fund a portion of construction, usually 70-80% of construction costs. If they do fund construction, ask: Do you have a draw procedure?It is likely, that you will need to provide a detailed, itemized construction budget. They will fund a portion of the construction in a “draw.” Once you spend that money, you call them to come view the construction progress and to see your receipts for work completed. Then, they will fund the next draw until the construction is completed.
Is there a prepayment penalty? What if I pay the loan early what will I be charged?
Some lenders figure their returns based on the full length of the loan. If you pay early, they won’t make the money they thought they would, and they want to penalize you for that. Some lenders disguise prepayment penalties with other crafty terms. Be sure to read all documentation before you sign it. I got burned with a $6000 prepayment penalty on one loan!
What do you need from me to underwrite the loan?
In theory, the lender is basing the loan on the deal – not on you or your credit. They should not need to run a credit check, but some still do. Likely, they will just need information on the deal – a proforma of the deal (purchase price, construction costs, after repaired value (ARV), estimated profit) and any information on the particular property.
Can I get three references from you from people that have taken out loans with you?
Always call at least three recent references. You’ll probably learn more from the references than from the actual lender.
Hope this helps!
As always, here’s to your success.