Hard money basics
A hard money loan is a loan secured by real estate that is not funded by a bank but by private investors. The hard money loan approval depends mainly on the remaining equity in the property after the loan. The loan safety is measured by the ratio between the property value and the loan amount. The lower the LTV, the more secure is the loan. Most private lenders prefer to lend on loan with LTV under 65%. For example, on a property value of $1,000,000, a 65% LTV is a loan for $650,000. With an LTV of 65% or lower, the lenders can care less about the credit and income of the borrowers. The investor who funds the hard money loan must assume that the borrower could default and that the lender will own the property through the mechanism of foreclosure.
Hard Money rate and terms
The hard money loan interest rate is typically much higher than the bank rate in 2022. The hard money rates are between 6% to 11%. The hard money loan duration generally is 12 to 36 months; in some cases, it can be extended to 5, 10, or even 30 years.
Hard money loan costs
Hard money loans are expensive compared to conventional bank loans. The origination fee for a hard money loan could be between 1% to 5% and even more. Some hard money loans have prepayment penalties ranging from 1 to 6 point that triggers if the borrower pays the loan before maturity or before some earlier designated time. The loan cost depends on the loan to value LTV, credit, location, loan amount, the speed required to fund, and other factors.
The purpose of hard money loans
Hard money loans play an essential role in the country’s economy by enabling people to borrow money from private investors when they can’t borrow money from conventional financial institutions. Banks and other conventional lenders can provide low-interest loans, but because of state and federal regulations, they have a strict underwriting guideline that excludes many would-be borrowers from obtaining loans. Banks rely on verification of income assets and credit which can take weeks to complete; hard money lenders are mainly concern with the loan to value (LTV). Borrowers who must close a transaction in under 3-week time are unable to do it with bank loans and have no choice but to use all cash or hard money private loans.
Why does it make sense to borrow a private hard money loan?
Hard money loans could cost twice as much as traditional bank loans, but it still makes sense to utilize this type of financing under these situations:
- A short-term solution is to acquire a property at a discount or for other reasons.
- Avoid losing property in foreclosure
- Avoid penalties and default from existing loans that are coming due.
- If the costs of obtaining the loan are less than the real or potential loss of not obtaining the loan, then the hard money financing is justified.
Where to find hard money lenders?
Before this year, Lendersa® finding hard money lenders was still done the same way it was done 40 years ago. The Private lending playing field is fragmented today almost as much as it was fragmented four decades ago. While it is wonderful news to hard money brokers and private investors, borrowers are often victimized by paying high-interest rates while getting lousy terms. Without Lendersa®, borrowers need to search the internet to find hard money lenders, explain the situation and hope that the lender will approve the loan. Borrowers can repeat the process with 2-4 lenders and see who can offer the best rate and terms, but since time is of the essence in most cases, the borrower will end up accepting an offer that is bad.
Lendersa® portal with thousands of competing hard money lenders
Instead of shopping for a loan manually, spending hours and days negotiating in the dark, Lendersa® platform enable borrowers for real estate transaction to enter a straightforward loan request and Lendersa® AI compares and match it with the best loan program out of thousands local and national lenders. The process is fast and 100% Free. The borrower does not require to enter his social security number but still gets accurate results in seconds.