by JJ Pawlowski
There are many ways to fund an investment purchase. A buyer might use cash, conventional financing, IRA funds, or an array of other ways to make the investment purchase. One common approach investors often use to fund their investment purchases, especially when rehab is involved, is with a hard money lender. A hard money lender can be a viable source of funding for your next investment purchase too.
What is a hard money lender?
A hard money lender is a company or individual making a non-traditional loan to a real estate investor. This type of loan is made to a real estate investor on an investment property using a loan to value ratio. A hard money loan typically has fewer borrower qualifications and usually takes less time to complete than a traditional loan. A hard money loan often includes rehab financing to complete work to the subject property. While a hard money loan does put more emphasis on the subject property and loan to value ratio, the borrower will still have to qualify for the loan.
What is “loan to value ratio”?
A loan to value ratio, often abbreviated “LTV”, is the calculation most hard money lenders use in determining the total amount of a loan for a subject property. Most hard money lenders use a 60%-70% LTV depending upon their certain loan program. For example, if a borrower wants to buy, rehab, and flip a property in a neighborhood where most properties are selling at an average of $100,000, and the hard money lender is using a 65% LTV, the borrower would expect to receive a total loan of $65,000 (65% of the value of the property, or 65% LTV).
Why should I consider using a hard money lender?
One of the main reasons is because a hard money lender will provide a loan a traditional bank may not provide. Many traditional banking and lending sources won’t provide rehab loans to investors. If an investor is buying a property that needs work chances are a hard money lender will be one of the only lending sources able to provide a rehab loan.
Am I working with a hard money lender or a loan broker?
Googling “hard money lender” you’ll literally receive millions of results in only a fraction of a second. While some of these results may be legitimate, many will not. In addition, you want to know if the company or individual you are working with is an actual lender (making the loan) or a loan broker (finding a lender to make the loan). There is usually nothing wrong in working with a loan broker so as long as you are aware of the role the loan broker is performing. Furthermore, you want to make sure you have some parameters set with the loan broker so your personal information isn’t sent all over the internet world, oftentimes referred to as “shot gunning the loan”.
Is a hard money loan expensive?
The definition of expensive depends on who you ask; it’s subjective to each individual. While one person may say a hard money loan is too expensive and they wouldn’t consider it, another might say it’s the cost of doing business. An investor may also have the opinion it would be better to use a hard money lender to do the investment in order to potentially make some money versus the alternative of not using a hard money lender and therefore not being able to do the investment at all.
Why do the numbers matter?
An investor should understand the numbers always matter in any investment! If the numbers don’t make sense it’s not a good investment, right? As mentioned above, a hard money loan is usually calculated using a LTV approach. Because of this approach it’s important for the investor to understand the numbers of the deal and the parameters of the hard money loan well before signing on the purchase contract or at the closing. The numbers to consider include the purchase price, rehab scope of work, lender costs, and closing costs. While it may sound simple enough, a mis-calculation of one or more of these may significantly change the amount of money a borrower may have to bring to closing, or may jeopardize the loan altogether.
What do I need to consider when looking at a hard money lender?
A few questions to ask and understand include:
- Are there any upfront or non-refundable fees?
- What are the loan costs?
- What are the loan terms?
- What is the LTV or max loan amount available?
- Is there a pre-payment penalty? (This is especially important if you are flipping the property)
- Are there monthly payments?
These are just a few of the initial questions you want to ask and review with the lender. Depending upon the lender’s criteria, the hard money loan may or may not make sense for your specific investment purchase.