New Funding Resources
Hard Money Q&A
What is a hard money loan?
A hard money loan is a type of mortgage loan. Hard money loans are used to buy and rehab properties that are dilapidated and require a renovation. Conventional lenders do not finance such properties because of 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, we in New Funding Resources don’t verify borrower’s income and don’t have minimum credit score requirements. Instead, we concentrate on a particular deal’s profitability and borrower’s likelihood to successfully finish the rehab and repay the loan. For more information about hard momey loans, please read here.
Q&A
Is hard money considered cash?
Is hard money cash or is it a loan? It’s easy to get confused. A short answer to this question is, yes, when making an offer on a distressed property, a hard money loan is considered cash. The main message that sellers are communicating by asking for a cash-only buyer is that their property is too dilapidated to qualify for conventional financing. A buyer – no matter how well-qualified – would not be able to obtain a mortgage with convenioal lenders such as banks and credit unions. Hard money lenders like us fill that vacuum by specializing in financing properties in disrepair. Our proof-of-funds letters are universally accepted as cash-equivalent. For more detailed explanation of why hard money is considered cash, click here.
Should you Pay Cash for an investment property?
It depends on your financial situation. If you have plenty of money to pay for the purchase and rehab with your own cash and if that cash is sitting under your mattress earning you nothing in the process, the answer is a resounding “Yes! Please put that money of yours to work.” However, I sincerely hope you don’t keep your cash under the mattress, and that your funds are already engaged somewhere else, be it in the stock market or other business opportunities. That means that even the most well-heeled investors might need access to additional capital. In other words, they choose to rely on private loans because their owns funds are already engaged somewhere else. Without access to that additional financing, even wealthy individuals would find themselves sitting on the sidelines missing investment opportunities. Read more here.
How do you get pre-approved for a hard money loan?
If you are new to private lending, you might have many questions about the hard money loan process. How do you get a pre-approval? What’s a POF? Are you guaranteed to get a loan if you’re pre-approved? Can you get pre-approved if you don’t have a property in mind? Once you go through our loan process, you would understand how easy it is. However, for those who’ve never worked with a private lender before, here is a step-by-step description of our hard money loan process.
Can you refinance a hard money loan?
A hard money loan is a type of a mortgage loan. As such, it’s also a lien secured against your property. Refinancing a mortgage typically means obtaining a new loan that pays your current lienholder whatever you own to them, so they can remove their lien off your title. That old lien is then replaced by a lien that secures the interest of your new 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 optons. Read about them here.
What are construction Escrows and why private lenders use them?
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 and a vision. 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 really go south, a lender might find itself with a dilapidated home and a loan that greatly exceeds its value.This is exactly why private lenders prefer to set money intended for the renovation in a construction escrow account. It gives them a mechanism to ensure that the renovation process is indeed taking place and the value of the property is, in fact, increasing. Read more here.
What is the Average Interest Rate on a hard money loan?
The average interest rates on a hard money loan vary from private lender to private lender. At New Funding Resources, our interest rates are based primarily on the strength of the borrower’s profile. To determine that strength, we might consider several factors but our focus is on the borrower’s experience: how many successful transactions does our borrower have under his or her belt? That said, we work with all types of borrowers including grizzled rehabbers and completely novice investors. Brand new investors have no demostrateable record of success and are considered a higher risk. However, as they become more experienced and build up their real estate portfolios, they might qualify for lower rates. For more information on the average interest rates on a hard money loan, read our blog.
How Fast Can I close on a Hard Money Loan?
The underwriting speed is one of the main differentiators between hard money loans offered by private lenders and conventional loans offered by traditional mortgage companies. “How long does it take to close?” is often the first question prospective borrowers ask. In many cases, this is a rhetorical question: if a new investor knows anything about private lending, it’s that it’s faster than other types of financing. Private lending does not provide consumer financing and is not subject to extensive regulations and requirements. Hard money financing is heavily focused on the property itself and its ability to make money for the investor and serve as sound collateral for the lender. When working with investors, the cornerstones of conventional underwriting, such as credit scores or the ability to make payments in the long term, might be less important. Hard money lenders can close within a week or two and often within days after you provide them with a clear title. However, if you’re starting your conversation with a private lender by asking them how fast they can close, you might be going down the rabbit hole. Here is why.
How Do I Choose a hard money lender that is right for me?
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. To find a private lender with a good reputation, look for reviews and referrals
6. Know the right questions to ask
7. Don’t chase the lowest rate
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
For more details, read here.
2. Have some savings.
3. Choose a hard money lender that is direct
4. Select a private lender who is local
5. To find a private lender with a good reputation, look for reviews and referrals
6. Know the right questions to ask
7. Don’t chase the lowest rate
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
For more details, read here.
What Are the Risks of Working with Private Hard Money Lenders?
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 to lose a property – are two most common examples of the bait-n-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 you pay the lender in interest. 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.
Inefficient Draw Disbursement And Management. Typically, your lender will set up an escrow account that will be used to finance the renovation of your investment property. The construction funds will be dispersed back to you in predetermined draws as your 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 before and after the closing is the key. Read more about how to avoid issues with escrow accounts here.
Unrealistic Exit Strategy. In private lending, exit strategy refers to how a private loan is paid off. There are two ways to pay off a loan. One is to sell the property, and another is to refinance it with another lender. Both exit strategy have their own risks. For example, if you are planning 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 need to be aware of current lending standards and whether they will qualify for another loan.
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 to lose a property – are two most common examples of the bait-n-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 you pay the lender in interest. 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.
Inefficient Draw Disbursement And Management. Typically, your lender will set up an escrow account that will be used to finance the renovation of your investment property. The construction funds will be dispersed back to you in predetermined draws as your 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 before and after the closing is the key. Read more about how to avoid issues with escrow accounts here.
Unrealistic Exit Strategy. In private lending, exit strategy refers to how a private loan is paid off. There are two ways to pay off a loan. One is to sell the property, and another is to refinance it with another lender. Both exit strategy have their own risks. For example, if you are planning 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 need to be aware of current lending standards and whether they will qualify for another loan.
