Hard money lending is increasingly popular, especially for real estate investors, as traditional banking institutions clamp down on financing and become more stringent due to regulatory winds shifting and higher interest rates. Don’t fall for the first hard money lender you find, though – be sure to bring these questions to ask a private money lender to ensure you’re on the same page.
What is Hard Money Lending?
Hard money lending in real estate is an alternative to traditional mortgaging that’s typically:
- Lent on a short-term basis.
- Focused on the “hard” asset underpinning the loan, i.e., the property, rather than focusing almost exclusively on borrower credit score, income, and similar metrics traditional lenders emphasize.
- Faster and requires less paperwork than traditional lenders
Ultimately, hard money lenders share your goal and vision that your property improvements will increase the home’s value (after-repair value), so they’re lending against that projection rather than the current value that traditional lenders use.
That said, knowing how hard money lending works can help you pick the best private money lender to suit your needs.
Here are the Top 10 Questions to Ask A Hard Money Lender
1. Can I get a loan for my current home?
Due to law and regulation, hard money loans are not available for primary residence; most hard money lenders won’t even finance individuals. Instead, you’ll need to secure financing through an entity like a registered LLC.
2. Does credit matter for hard money lenders?
While it isn’t the dealbreaker it can be with traditional mortgages, hard money lenders will pull a credit report during underwriting. Instead of focusing on the number, though, the emphasis is on trendlines.
For example, if you’re previously self-financed Fix & Flips, you’d expect to see intermittent dips and valleys in your credit history as you took on consumer debt to fund a project. This would be followed by a peak as the project closed, and you returned capital.
Even with adverse events in the past, hard money lenders can look past some negatives if your recent history is clean.
3. What is the difference between hard money and a private lender?
A lot of alternative financing and debt terms can be tough to pin down (and there tends to be a lot of overlap), but, generally:
- A private lender describes an individual financing a project with their personal capital.
- A hard money lender is an organization or company that finances projects and real estate investments for a living.
There are many risks to sticking with a private lender, but they primarily include the potential revocation of committed capital or even simply running out of money. In comparison, established hard money lenders have decades of collective experience and have funded millions of dollars worth of projects.
4. What is the typical length of a hard money loan?
Hard money loans tend to have a 12-month maturity date, though some companies will extend it slightly if circumstances warrant it. On the flip side, the best hard money lenders don’t punish you for pre-payment, so you’re free to pay down the debt early as your project progresses. Likewise, hitting a 12-month maturity, even for short projects, builds valuable flexibility, especially when you’re free to pay it off early.
5. What kind of interest and points are involved?
You’ll generally see 0 – 3 origination points and rates between 9% and 14%. However, note that (typically) loan payments are interest-only until maturity, letting you maximize cash flow mid-project.
6. Will the loan cover repairs if I am trying to fix and flip a property?
Not only will a hard money loan cover a fix and flip, but many lenders’ loan books are almost exclusively fix and flip properties (they’re our bread and butter, personally). Buying a distressed property through a hard money loan, cleaning it up, and selling for a profit is one of the most popular real estate investment strategies. We offer up to 85% of the purchase price and 100% of the rehab costs.
7. Do I need to bring my own money to the table?
We require borrowers to stake 10% — 20% of the deal cost out of pocket. Doing so helps keep our interests aligned and focused on the goal of executing a successful real estate investment project or cycle. Doing so also helps you look at your own capital to begin planning for unexpected contingencies and building out a separate project emergency fund.
8. Do hard money lenders care about the project’s specifics?
Hard money lenders finance projects, but they’re also industry experts and will closely examine your plan and strategy. Underwriters and loan officers will look through the specifics with you, so be sure to have a well-developed plan addressing friction points. We’ll help clarify or refine things as we go if needed, but starting from a solid foundation goes a long way toward fast funding.
9. How much money can I get from a hard money loan?
This varies based on the project and your circumstances; however, our current programs start at $100,000 and may go as high as $3,500,000 for eligible borrowers.
10. What is the process to apply for a hard money loan?
The first step is contacting a hard money lender to explore typical terms. You’ll cover basic deal economics and see if your project is a good fit for their financing; from there, you’ll fill out a loan application and provide basic documentation like purchase contracts, scope of work for rehab, and the like. The lender will also appraise the property during this period.
Later, loan underwriters collect additional information about you (as the borrower), like credit history, income, and cash reserves. If you’re using one, you’ll also have to provide information about the contractor, like their title and insurance documents. Remember, we only lend to entities, so you’ll also need to provide your EIN and formation documents during this phase.
Once ready (depending on the loan type), the loan closes, and you’re funded. If you want to explore our lending process further, you can find more information on how we work here.
Did we miss any questions? To see if we’re a good partner for your next project, or if you want to see if hard money lending is right for you, pre-qualify today.