Hard Money Lenders
- Thread starter sah
- Start date
sah said:
What exactly is Hard Money Lending?
Hard Money lending can be very profitable. It a natural progression that a real estate investor end up being a hard money lender later on in their career. However, I actually started out as a hard money lender early on in my investment career. Being the bank is always at the top of the food chain. Your money makes money and it's secured by a valuable asset.
WARNING:Unless you have adequate money to lend, don't be a hard money lender. If you lend on a project and the borrower defaults, foreclosing isn't a quick or cheap process. It is full of "red tape". You may also find out that the project isn't as equity rich as you thought it was. You have to truly understand how to spot a great real estate deal. Why? Because you don't want to lend money on the crappy ones.
Ok.... Soft Money -vs-Hard Money
Tale of the Tape
NOTE:Mortgage companies lend to all types of credit. The terms, rates, and conditions of mortgages vary greatly based on the lender and based on your credit scores. Some soft money is very close to hard money rates and terms. You can get a loan if you have a 500 credit score, active collections, bankruptcy and/or foreclosure. But it may costs you soooo much that you find you that your mortgage on a $200k house is compareable to the mortgage on a $400k or higher house for someone with better credit scores.
Soft Money* (i.e. the Bank or a Mortgage Company)
Rates:6% - 8% APR (fixed rate, adjustable rate, interest only)
FICO Criteria - 600 Fico or better
Documentation: Full Doc = Assets & Employment verification. May look at your debt to income ratio (credit cut off may be 600) Low Doc= one or the other; not both (credit cut off may be 660), No Doc = no verification of employement or assets (credit cut off may be 690)
LTV (Loan to Value Ratio): Up to 100% (as of last year, and even now, some banks were lending 105% - 110% LTV, but as the market has cooled, banks are getting more strict on lending guidelines. They want to limit their exposure)
Points (a point is a fee equal to 1% of the loan amount): 0 points to 1 point for origination fee or broker fee. You may be able to buy the rate down for additional points (usally 1/2 point to 2 points)
Terms: 15,30 year mortgage (some even offer a 40 year mortgage),No prepay penalty.
Hard Money (a private lender or a broker that has access to private lenders.)
Rates:9% - 15% APR (fixed rate, interest only for 6 months)
FICO Criteria - It's likely FICO scores are not taken into account at all.
Documentation: Low Doc or No Doc
LTV (Loan to Value Ratio): Only up to 70%. Some only do 65%
Points (a point is a fee equal to 1% of the loan amount): 5 points on average...OUCH!! If you are doing a $300k project, you will have to pay $15k in points!!! This is where the hard money lender or broker makes the bulk of their cash. Usually, a rate buy down isn't available
Terms: 6 months to 1 year. May have a prepay penalty
Summary:
Soft money is cheaper. It can be slower and less flexible (i.e. not investor friendly). Be prepared for a mountain of paperwork. Be prepared for two mountains of paperwork if you are self employed. As a side bar, never classify yourself as self employed if you don't have to. Remember that your corporation is a seperate entity..you are the managing partner, operations manager, Sr. Vice President,etc. You are an employee that owns stock in the company. If you work at Verizon and you participate in the stock program you only have to show a W2 and 1040 when applying for a loan...but once you clain ownership, you have to start producing you company's P&L statements and corporate taxes as well as other documents )
Hard money is more expensive, but you can move quickly and the lender/broker understands you business. If the cost of money isn't an issue, but the availability of money is, then Hard money may be your solution.
Consider establishing a signature line of credit that allows you to move quickly. The rate wont be as good as a 6%, 30 year mortgage, but you will be able to move in and out of projects with ease and you won't be paying 5 points AND 14%.
On a sixth month project, the difference between a 6% mortgage and a 12% mortgage usually isn't a deal breaker. If it is, that means your profit was too slim anyway. paying 5 to 8 points may not be a deal breaker, but it can act as an unmotivator. On a 200k project you may have a net projected profit of 40k, but your hard money lender may be making 16k in upfront fees, plus your monthly payments are just paying the interest on the loan, none of the principal, so he'll probably pull a few thousand more in interest payments. He could be looking at close to 20k in a 6 month period.
Real1
WARNING:Unless you have adequate money to lend, don't be a hard money lender. If you lend on a project and the borrower defaults, foreclosing isn't a quick or cheap process. It is full of "red tape". You may also find out that the project isn't as equity rich as you thought it was. You have to truly understand how to spot a great real estate deal. Why? Because you don't want to lend money on the crappy ones.
Ok.... Soft Money -vs-Hard Money
Tale of the Tape
NOTE:Mortgage companies lend to all types of credit. The terms, rates, and conditions of mortgages vary greatly based on the lender and based on your credit scores. Some soft money is very close to hard money rates and terms. You can get a loan if you have a 500 credit score, active collections, bankruptcy and/or foreclosure. But it may costs you soooo much that you find you that your mortgage on a $200k house is compareable to the mortgage on a $400k or higher house for someone with better credit scores.
Soft Money* (i.e. the Bank or a Mortgage Company)
Rates:6% - 8% APR (fixed rate, adjustable rate, interest only)
FICO Criteria - 600 Fico or better
Documentation: Full Doc = Assets & Employment verification. May look at your debt to income ratio (credit cut off may be 600) Low Doc= one or the other; not both (credit cut off may be 660), No Doc = no verification of employement or assets (credit cut off may be 690)
LTV (Loan to Value Ratio): Up to 100% (as of last year, and even now, some banks were lending 105% - 110% LTV, but as the market has cooled, banks are getting more strict on lending guidelines. They want to limit their exposure)
Points (a point is a fee equal to 1% of the loan amount): 0 points to 1 point for origination fee or broker fee. You may be able to buy the rate down for additional points (usally 1/2 point to 2 points)
Terms: 15,30 year mortgage (some even offer a 40 year mortgage),No prepay penalty.
Hard Money (a private lender or a broker that has access to private lenders.)
Rates:9% - 15% APR (fixed rate, interest only for 6 months)
FICO Criteria - It's likely FICO scores are not taken into account at all.
Documentation: Low Doc or No Doc
LTV (Loan to Value Ratio): Only up to 70%. Some only do 65%
Points (a point is a fee equal to 1% of the loan amount): 5 points on average...OUCH!! If you are doing a $300k project, you will have to pay $15k in points!!! This is where the hard money lender or broker makes the bulk of their cash. Usually, a rate buy down isn't available
Terms: 6 months to 1 year. May have a prepay penalty
Summary:
Soft money is cheaper. It can be slower and less flexible (i.e. not investor friendly). Be prepared for a mountain of paperwork. Be prepared for two mountains of paperwork if you are self employed. As a side bar, never classify yourself as self employed if you don't have to. Remember that your corporation is a seperate entity..you are the managing partner, operations manager, Sr. Vice President,etc. You are an employee that owns stock in the company. If you work at Verizon and you participate in the stock program you only have to show a W2 and 1040 when applying for a loan...but once you clain ownership, you have to start producing you company's P&L statements and corporate taxes as well as other documents )
Hard money is more expensive, but you can move quickly and the lender/broker understands you business. If the cost of money isn't an issue, but the availability of money is, then Hard money may be your solution.
Consider establishing a signature line of credit that allows you to move quickly. The rate wont be as good as a 6%, 30 year mortgage, but you will be able to move in and out of projects with ease and you won't be paying 5 points AND 14%.
On a sixth month project, the difference between a 6% mortgage and a 12% mortgage usually isn't a deal breaker. If it is, that means your profit was too slim anyway. paying 5 to 8 points may not be a deal breaker, but it can act as an unmotivator. On a 200k project you may have a net projected profit of 40k, but your hard money lender may be making 16k in upfront fees, plus your monthly payments are just paying the interest on the loan, none of the principal, so he'll probably pull a few thousand more in interest payments. He could be looking at close to 20k in a 6 month period.
Real1
Last edited:
T
TheHookUp
Guest
Hey what's up. I do hard money lending. Can you send me your scenerio? wdcintl@yahoo.com
