Probably one of the greatest resources a real estate investor can have is a great lender. Sometimes some deals don’t fit the criteria for traditional lenders. This doesn’t mean you can’t finance the property. It simply means you might need to look into alternative types of loans. You’re getting ready to learn how within a few minutes and be on your way to expanding your rental property portfolio.
What is a hard money loan?
A hard money loan is a type of real estate loan issued by a private lender for non-owner occupied property. Hard money loans are usually short term, between six and 36 months, and have a higher interest rate than traditional bank loans.
They base the approval of hard money loans on the value of the real estate more than the creditworthiness of the borrower. These loans provide an exceptionally fast approval time for you, the borrower. Hard money loans are often closed within two to four weeks.
What categories of real estate do hard money lenders finance?
Hard money lenders loan on any type of non-owner occupied real estate yet they are usually looking for situations with a fairly quick exit strategy so they know they’ll get paid by the end of the term of the loan.
How are hard money loans different from bank loans?
Mainly the difference between a hard money loan and a typical bank loan is the lender itself. Since they use these loans for non-owner occupied real estate, they aren’t regulated like consumer mortgages. This means hard money lenders can charge higher interest rates and fees and get away with terms that wouldn’t be allowed with traditional loans.
Even though the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) rarely apply to commercial mortgages, there are still regulations that traditional financial institutions have to follow. The Federal Deposit Insurance Corporation (FDIC still regulates federally insured banks) and credit unions by the National Credit Union Administration (NCUA). Hard money lenders don’t have any regulations placed on them.
Great for fixer uppers and flip properties
Hard money loans are very common with properties bought for fixing and flipping. Many lenders will even finance the repairs on the property. These types of deals are ideal for the lender since flips are usually bought, fixed and sold within six months.
If the lender is also financing the repairs, they will estimate the cost of the repairs and issue draws as the borrower needs them to pay for the work being done. This ensures that the funds are being used for the repairs and limits the lender’s exposure since they’re only giving out portions at a time.
Hard money lenders even prefer to finance the repairs many times so they know the borrower will complete the project. If the borrower gets through the demolition and runs out of money, the value may become less than the purchase price. By financing the project, they don’t have to worry about the borrower not being able to finish the job because of a lack of funds.
Hard money lenders will also provide short-term loans for residential real estate investment properties. The goal here is usually to refinance the property in 12 to 36 months to pay off the hard money loan.
Investors may turn to a hard money loan for a rental property if they need to close the deal quickly and don’t have the time to go to a bank. They may also need a private loan if the rental property needs repairs before a bank will finance the deal.
Similar to loans for rental properties, investors may need capital quickly to close on a multifamily property when there’s not enough time to go through the traditional lending process.
An investor may also buy a multifamily property with little to no tenants that needs a lot of repairs. This type of property would be hard to get financed with a bank, so they may seek a hard money loan. They can get the work done and lease the property before refinancing it with a long-term loan.
Commercial real estate
A common situation with commercial real estate is an investor having a tenant to lease space to but no property to put them in. The investor will find a vacant property that the tenant will lease out, but they have to purchase the property and get it ready for the tenant first.
A bank may not want to finance a vacant property intended for use as an investment if the borrower doesn’t have the assets to secure the loan. A hard money loan can be useful in this situation to get the deal done, do the tenant improvements, and get it leased. Once the tenant is in place and paying rent, a bank will be more willing to finance the real estate.
Our Rental Loans program provides long-term financing for single family residential properties, multi-family properties, commercial properties and portfolios. Rental property loans are essential to building long-term wealth through rental real estate. Our mission is to provide you with flexible, private real estate rental loans, allowing our clients to attain financial freedom through real estate investing.
Loan approval guidelines
Hard money lenders don’t normally follow the same underwriting procedures as banks. They don’t pick apart the borrower’s finances like a bank does, in most cases. They are not usually as concerned with where the down payment funds came from. You may be surprised at the ease of approval for these type investor loans.
The lender will probably do a credit check, but unless the borrower has terrible credit, they will be approved. They mainly want to make sure the borrower hasn’t defaulted on several loans or isn’t drowning in debt.
The primary concern in the underwriting process is the value of the property and the market it’s in. Hard money loans are a higher risk for the lender, so they want to make sure they are going to get their money back if they have to foreclose.
There’s usually an appraisal to verify the property value, but the lender also wants to make sure that similar houses are selling in a reasonable amount of time in that market. They don’t want to be sitting on a house for several months waiting for it to sell.
The lender has to consider the borrower’s exit strategy, since this is how they are going to pay off the loan. There is a balloon payment at the end of the short term, so they want to be confident that the borrower can pay it.
If the borrower is planning on flipping the property by renovating it and selling it at a profit, the lender knows they’ll get paid at the closing table once the borrower sells.
If the borrower intends to refinance the property by the end of the term, the lender will want to be confident that they will get financed.
Some hard money lenders also offer long-term financing on investment properties with five- or 10-year terms. They may do the refinancing in-house if the borrower meets the credit requirements.
The lender might also go into the loan intending to renew the hard money loan if the borrower can’t get refinanced in time. This isn’t a terrible situation for the lender because they will continue to get the high interest rate for another term.
Our private lenders specialize in providing rental property loans for investors looking for landlord loans, portfolio loans, and rental property loans.
We can get our clients rental real estate loans closed quickly because of a streamlined internal underwriting process, dedicated support staff, that emphasizes only the property level cash flow. Unlike conventional banks and hard money lenders, who underwrite borrowers personal finances. These rental property loans are tailored for real estate investors.
Click HERE TO APPLY FOR A LOAN PROGRAM THAT IS DESIGNED FOR INVESTORS NATIONWIDE SEEKING A SIMPLE FINANCING SOLUTION FOR PURCHASE OR REFINANCE, WITH THE FLEXIBILITY TO REMAIN IN THE LOAN FOR UP TO 30 YEARS AND CASH-OUT UP TO 80% OF LTV.
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