Hard money loans fill the niche left out by conventional lenders.
A hard money loan is a type of mortgage loan. Hard money loans are typically used to buy and rehab properties that are in bad shape and require renovation – properties that conventional banks would not lend on. Another major difference between hard money loans and conventional loans is that hard money loans are based on the after-repair value of the property and not on the home’s purchase price or its current market value. This value is estimated by looking at newly renovated properties in the neighborhood that are of similar style and size. Because the after-repair value of the property is higher than a purchase price, hard money lenders can lend a significant portion of the purchase price and rehab budget. Without a hard money loan, the only option to buy a property that doesn’t qualify for conventional financing would be to pay cash. With a hard money lender, you can leverage a modest nest egg to compete with all-cash buyers.
Hard money loans are more expensive because they assume more risk.
Hard money loans are more expensive than conventional financing. Why? Because they assume a higher risk. After all, they’re based on the value that is not there at the time the loan is issued. An after-repair value is an estimate of the future value that might or might not come true. If a borrower wouldn’t rehab a property as promised, a lender might end up with a loan on a distressed property that far exceeds its value in its current conditions. A conventional lender would not touch a scenario like this with a ten-foot pole, but hard money lenders do – but at an increased price.
Hard money loans should not be confused with subprime loans.
Hard money financing can only be used for investment properties. It should not be confused with subprime loans – loans designed specifically for high-risk borrowers: those with poor credit or no income. Though hard money loans might offer the same underwriting flexibility as some subprime loans (for example, we at New Funding Resources are not credit-score driven and don’t verify your income), they are specifically restricted to investors only. No owner-occupied properties can be financed by hard money.
For hard money loans to work, the after-repair value of the property must be high enough to cover the purchase price, the rehab budget, and all other costs associated with the transaction. Perhaps most importantly, it should leave room for sufficient profit for the borrower to compensate for his or her work and time.
Hard money loans are typically short-term.
To those with a limited amount of cash, hard money loans offer a unique and often the only opportunity to fix-and-flip a property. Once the renovation is complete, there is no reason to stick with a hard money loan. An average borrower repays a hard money loan with a year by either selling the property or refinancing it with a conventional lender to a lower rate.
Not all hard money loans are created equal.
Now you know what a hard money loan is – at least generally speaking. However, the types and terms of hard money loans vary from lender to lender. Before deciding which route to go, research private lenders in your area. The process of servicing a hard money loan is very different from servicing a conventional loan. You will have much more contact with your hard money lender and it’s important to know that not only they offer competitive pricing structure but are also responsive and efficient. New Funding Resources is the top direct private lender in Maryland, DC, and Virginia. We’ve helped thousands of investors make money in the local DMV market and will be delighted to have your business.
Still have questions about what a hard money loan is? Need advice on how to start flipping properties in the Washington, DC area? Looking to take your rehab business to the next level? Call New Funding Resources at 240-436-2340 today.