Hard money lenders are companies that provide financing that is secured by real estate. The loans are short-term and generally have a term of around 12 months, but in some special cases the loan term can be extended to 3 or even 5 years. The loans are often interest only, which is paid monthly, with a balloon payment at the end of the term.
The amount the hard money lenders are able to lend is based on the subject property the borrower either owns or is attempting to secure. Hard money lenders are more concerned with the value of the property than the borrower’s credit, although credit is still important to the lender. Borrowers who are unable to get traditional financing due to a recent foreclosure or short sale can still obtain a hard money loan if their credit is otherwise strong. The Dodd-Frank Act, which passed in 2010, now requires that hard money lenders San Diego ensure that the borrower has the ability to repay on residential loans. Because of this regulation, the hard money lender will be required to document income by requesting information such as bank statements and tax returns.
Hard money lenders will lend on a many different types of property including commercial, residential, land and multi-family.Hard money lenders will usually lend up to 65% of the current value of the property for residential and multi-family but only 50% for land. This is known as the loan to value or LTV. The lower loan to value ratio for land loans is due to the higher risk associated with the property type.
Special Licensing Required for Lenders
Hard money lenders who finance residential properties must have a National Mortgage Licensing System (NMLS) endorsement on their Real Estate Broker’s license. Not having this endorsement could prevent the loan from going through at closing, so the borrower must ensure that the broker they are working with is properly licensed.
Interest rates for hard money loans are higher than traditional bank loans due to the higher risk associated with the loans. Currently, interest for hard money loans ranges from 9% to 15%. The interest rate will fluctuate based on how risky the hard money lender perceives the loan to be.
In the past decade fix and flip loans, or rehab loans, have become very popular with hard money lenders as real estate investors have turned to these types of projects in search of quick profits. The real estate investor purchases the property and quickly makes improvements before selling it. Traditional lenders will generally not lend on this type of loan, and if they did it could take 30-60 days to get the loan completed. Getting financing from hard money lenders comes with the benefit of very quick funding. Some lenders can fund a loan in as few as 3 to 5 days, which allows the real estate investor to offer a much quicker closing time than competing offers utilizing institutional financing.