Hard Money Q&A

A hard money loan is a type of mortgage loan. Hard money loans are used to buy and rehab properties that require renovation. Conventional lenders typically do not finance such properties due to the high risk associated with them. Hard money loans can only be used for investment purposes and cannot be used to finance primary residences. Terms and conditions of hard money loans vary from lender to lender. For example, at New Funding Resources, we don’t verify borrowers’ income and don’t have minimum credit score requirements. Instead, we focus on a particular deal’s profitability and the borrower’s likelihood of successfully completing the rehab and repaying the loan. For more information about hard mommoneyey loans, please read here.

Both terms are used interchangeably. Some lenders refer to themselves as hard money lenders, while others prefer to be called private lenders. Both are typically smaller non-institutional investors that concentrate on lending to real estate investors rather than consumers. For more information, read our article on the difference between private and hard money lenders here.

Some properties are offered with the disclosures such as “investor special,” “sold as-is,” or “cash-only.” Essentially, these disclosures indicate that the property is in such poor condition that it does not qualify for conventional financing. You can pay for it in cash or finance it with a hard money loan, which is universally considered a cash equivalent.

Of course, in layman’s terms, cash is the opposite of a loan. However, in the real estate industry, hard money loans are considered cash because they rarely come with financing or home inspection contingencies and can close as quickly as any cash-only transaction. If you would like a more detailed explanation of why hard money is considered cash, please click here.

Pre-approval for a hard money loan varies depending on your lender’s requirements. At New Funding Resources, we consider two major aspects of the transaction: the borrower’s financial strength and the specific collateral in which the borrower is interested in investing.

For those borrowers who are starting out and would like to know how expensive of an investment property they can afford to buy, we offer general pre-approvals non-related to a specific property. The general pre-approval is typically driven by how much of their own funds these borrowers can potentially invest into a real estate transaction. The more money you have, the more we can lend you and the more expensive project you can afford. The pre-approval process culminates in the lender issuing a document to the borrower, known as a proof of funds letter (POF). A POF informs the sellers that the borrower has access to funds to purchase their property quickly and with the minimum hassle.

To learn more, you can read more details on our pre-approval process.

1. Educate yourself on the hard money industry first
2. Have some savings
3. Choose a hard money lender that is direct
4. Select a private lender who is local
5. Look for reviews and referrals
6. Know the right questions to ask
7. Don’t chase the lowest rate, consider the overall package that lender provides
8. Look out for the red flags
9. Make sure you are free to select your own vendors
10. Your lender’s follow-up is an indicator of its future performance
11. Trust your gut, but verify

For more details, read here.

Private lenders do not offer consumer financing and are not subject to the same extensive regulations and requirements as banks. They also underwrite their loans differently. Due to these factors, their underwriting process is significantly faster and less complex than with traditional lenders. At New Funding Resources, we typically can close within 10 business days. The process can be expedited even further if you already ordered the title work and the appraisal.

Yes, you do need an appraisal to obtain a hard money loan, but not the traditional appraisal you are accustomed to. When you work with a convention lender, your lender will require an appraisal that reflects the current value of the property you are buying. Because hard money lenders base their loans on the after-repair value of the property, they require an appraisal that reflects that future after-repair value.

How can you determine that after-repair value? By looking at the newly remodeled homes in the immediate neighborhood that your property will closely resemble after you’re finished with your renovations. The appraiser (and your hard money lender) will also require you to submit a statement of work that details the improvements you plan to make. This way, they can identify the best comps to base their estimate on.

Like everything else, private lending and hard money loans come with their own risks. Here are the risks you need to be aware of and be prepared to manage:

Pricing Bait-And Switch. Increasing rates and not disclosing fees until the very end of the process – when a real estate investor is forced to accept these higher costs or risk losing a property – are two of the most common examples of bait-and-switch tactics in private lending. Read more on how to combat unscrupulous pricing tactics here.

High-Costs of Carry A Private Loan. The longer you hold the loan, the more interest you pay to the lender. The more you pay in interest, the smaller your profit will be. Here’ is how to put more money in YOUR pocket, not LENDER’S‘s how to put more money in your pocket, not the lender’s.

Inefficient Draw Disbursement And Management. Typically, your lender will set up an escrow account to finance the renovation of your investment property. The construction funds will be dispersed back to you in predetermined draws as you complete certain stages of renovation. It takes two to tango, and the efficient management of your construction escrow funds depends on the lender and the borrower. Clear communication, both before and after the closing, is key. Read more about how to avoid issues with escrow accounts here.

Unrealistic Exit Strategy. In private lending, an exit strategy refers to the process by which a private loan is repaid. There are two primary ways to repay a loan. One option is to sell the property, and another is to refinance it with a different lender. Both exit strategy have their own risks. For example, if you plan to sell your property but price it unrealistically high, it will sit on the market while you continue to pay interest on your private loan. If the exit strategy is to refinance a loan with another lender, the borrower needs to be aware of current lending standards and whether they will qualify for another loan.

The average interest rates on a hard money loan vary from one private lender to another. At New Funding Resources, our interest rates are primarily based on the borrower’s profile strength. The most important determining factor there is the borrower’s experience. The more flips they have under the belt, the less risk they represent to a lender. The experience needs to be direct: you or your LLC must have assumed ownership of the property you claim you’ve renovated and sold.

Our rates range from 10% to 12% interest-only, depending on the investor experience.

A hard money loan is a type of mortgage loan. Refinancing a hard money loan typically means obtaining a new loan that pays off your current lienholder’s outstanding balance, allowing them to remove their lien from your title. That new loan can be issued by another private lender or, if your renovation is complete, by a conventional lender. In theory, any debt can be repaid and any lien can be refinanced. In practice, for a new lender to refinance your current loan, you need to meet their underwriting standards. These underwriting standards vary from lender to lender. If you’re looking to refinance a hard money loan, we offer several options. Read about them here.

Private lenders base their loans on the after-repair value of your property. In other words, unlike a conventional lender’s value that is here and now, the value that a private lender uses is an aspiration, a vision, and, as such, a RISK. It depends entirely on borrowers’ ability to execute that vision. If things go according to that plan, you will soon have a beautifully renovated property. If something goes south, a lender might find itself with a dilapidated home and a loan that greatly exceeds its value.

To manage their risk, private lenders do not allow their borrowers to access their entire construction amount. Instead, they disperse it in a series of predetermined draws that have been agreed upon with the borrower prior to loan closing. Such an agreement is referred to as a “Draw Schedule.” To avoid any misunderstandings, it’s essential to create a clear and detailed draw schedule. To read more about construction escrows and draw schedules, click here.

In most cases, the answer is no. There are several reasons for this. Hard money loans are for real estate investors, and as such, these investors need to have some funds to invest. Private lenders also want to see that the borrowers are committed to the transaction by having some skin in the game and sharing some of their risk. Otherwise, they are lending to a real estate speculator, who can easily walk away from the deal when the going gets tough.

That said, at New Funding Resources, we provide our borrowers with substantial leverage. It’s not unusual for us to cover 85% to 90% of your purchase price and your renovation costs combined, which often results in our loan covering and even exceeding 100% of the purchase price of your investment property.

There are some exceptions to the rule of “no money no loan.” This rule does not apply if you already have an investment property with substantial equity. A real-life example of this is an inherited property that you plan to improve before selling. Alternatively, you might own other free and clear investment properties that you can use for cross-collateralization. Click on the blue links to read more.

Many lenders require their borrowers to use licensed contractors. At New Funding Resources, we use common sense. If you are undertaking a large-scale renovation project that involves moving bearing walls, adding bathrooms, or making other structural modifications, it would be irresponsible and financially reckless not to obtain permits or hire licensed professionals. However, if your improvements are of a more cosmetic nature, you might be able to reduce your costs by working with reputable non-licensed professionals.