How Does Hard Money Lending Work?
If you need money for a project or to get through a challenging financial period, taking out a loan could be a suitable alternative.
However, with so many loan alternatives available, it can be challenging to locate the best one for your needs.
Hard money loans might be beneficial if you need funds immediately or do not qualify for other types of finance. But how does hard money lending work, and how do they vary from regular loan options?
Learn more to find out how a hard money loan could help you achieve your financial needs.
Hard Money Loan Request
If you prefer to email us, fill out the form below and an associate will contact you to review the loan scenario and provide a quote.
What is a Hard Money Loan?
Hard money loans are short-term financial instruments that real estate investors might employ to fund an investment project.
This form of financing is frequently used by home flippers or real estate developers whose purpose is to renovate or improve a property and then sell it for a profit. Rather than conventional financial institutions such as banks, private lenders provide hard money loans.
Unlike regular bank loans, the ability to get hard money funding is not governed by the borrower’s creditworthiness. Instead, hard money lenders base their decision on the worth of the property itself. Lenders are particularly interested in the “after repair value,” or ARV, which estimates what the property will be worth once the rehabilitation or construction phase is complete.
Understanding Hard Money Lending
Before approaching a hard money lender for a loan, you must understand the various property types and loan types best suited for hard money lending.
Property Types
Hard money loans for real estate are helpful as asset-based loans for various properties. The majority of hard money lenders provide loans for residential properties – typically one to four units – but, in certain situations, will also issue loans for commercial buildings. These property types include single-family, residential, commercial, retail, industrial, hotels, healthcare spaces, office buildings and properties, and individual purchase properties. Hard money lenders will typically specialize in some, but not all property types. Each lender will have a niche they like to stay within.
Hard money lenders also consider whether the property is owner-occupied or not. While most hard money lenders will not lend to owner-occupied properties due to additional constraints, at California Hard Money Direct, we offer owner-occupied hard money loans. Non-owner-occupied properties, on the other hand, can be approved and funded swiftly due to the lack of government control or licensing.
Types of Loans
Below are some of the various types of loans that hard money lending from California Hard Money Direct can assist you with:
- Bridge loans
- Commercial hard money loans
- Construction completion loans
- Distressed property loans
- Estate loans
- Fix & flip loans
- Investment property loans
- Subprime mortgages
- Purchase loans
- Private money loans
- Non-QM loans
- Owner-occupied hard money loans
- Reverse mortgages
- Multifamily loans
- Land loans
- Trust loans
- Residential hard money loans
- DSCR loans
Hard Money Lending in California
Hard Money Lending Advantages
The following are some of the advantages of obtaining funding through a hard money lending loan:
Fast Funding
Hard money lending is quick, with loans available in days or weeks (depending on negotiations). Hard money loans can assist in speeding up the development process, which is especially important for significant projects.
Flexibility
Since you are dealing directly with private or individual investors, you can negotiate terms with hard money lending loans. Banks are less flexible.
Collateral
The property itself serves as security for the loan when using hard money financing. Other assets, such as a retirement account or a home in your name, may be accepted by some hard money lenders as a starting point for a loan.
No Red Tape
Obtaining a standard mortgage for an investment property is difficult, if not impossible. Traditional borrowers must be concerned about their credit score, LTV ratios, debt-to-income ratios, and various other indicators. On the other hand, hard money lenders are asset-based lenders who care more about the property than the borrower’s qualifications.
Convenience
The benefit of being able to close with cash is undeniable. Providing bank records, income documents, tax returns, and leases to a lender can become tedious and drain your concentration and energy. On the other hand, hard money lending bypasses the middleman and eliminates a lot of the hassles.
Hard Money Lending Criteria
The requirement for a hard money loan differs from one lender to the next. Because private persons or businesses frequently make hard money loans, there is more leeway for negotiation. The following are the general hard money lending criteria.
Loan Terms
In most cases, a hard money loan is a short-term loan. Typical terms range from 12 month to 60 months. Private lenders prefer the loan to have a 6 month pre-payment penalty. This is great for a real estate investor who deals in short-term investments and can rapidly refurbish and sell a house. It’s critical to complete rehab work quickly and sell the house as soon as possible, as each additional monthly mortgage payment reduces profit. Lien Position
Hard money lenders typically require first-lien status. This means that if the borrower fails on the loan, they will be paid “first in line” from foreclosure sales. Occasionally, such a lender will assume a second-lien position, in which case the transaction is referred to as a “mezzanine loan.” Some hard money lenders, such as California Hard Money Direct, may be willing to provide 2nd lien position loans in certain cases.
Loan to Value (LTV)
The amount of money a hard money lender can lend is based on the loan amount divided by the property’s value. We call this the loan-to-value (LTV). It is common among hard money lenders to lend up to 65–75 percent of the property’s current value. Some lenders will lend based on the after-repair value (ARV), which is the property’s expected value after the borrower has improved it. DSCR loans can go all the way up to 80% LTV.
Approval Timeline
Due to their minimal documentation requirements and rapid underwriting procedure, hard money lenders can frequently fund loans in as little as 5-7 business days.
Loan Rates & Points
Hard money lenders offer a higher interest rate because they take on greater risk and the periods are short – typically 12 to 60 months. Rates are typically higher than those for subprime loans, ranging between 8% to 11%. Additionally, there may be a prepayment penalty on occasion.
Along with the base rate, there will be “point rates.” A “point” is 1% of the total principal, and hard money loans typically charge 2 points.
Hard Money Lending Requirements
Compared to traditional bank loans, hard money loans for real estate have fewer requirements. They include:
- 25-30 percent equity in the hard asset
- Recent appraisal and inspection data
- Property location
- (Flip properties) Estimated remodeling expenses (renovation plans, contractor bids, and draw schedule)
- Stated income only. No tax returns
- First-time investors welcome
- No limit to the number of properties owned
Finding The Best in Hard Money Lending
The reputation of a hard money lender is critical in avoiding scams or blunders during the application, approval, or funding process. When selecting a reliable private lender in your location, consider their experience, previous funding transactions, and client reviews on their services.
If you’re looking for hard money lenders in California, go no further than California Hard Money Direct. Our hard money lending services provide innovative solutions to meet the demands and expectations of our borrowers. We take pleasure in providing our customers with high-quality service delivered on time. Don’t hesitate to contact us today to learn more about our hard money loan services.
Read what other borrowers have to say about working with our hard money lenders.
Ray V
This company is on it and makes the loan process easy. Great communication and closed fast on my loan. Will definitely recommend.
Arbi Z
It’s an excellent place to do business with. There were no surprises, everything went smoothly and good from the first phone call until the end. Judy was taking care of me. She is so professional you won’t regret working with.
Wendy O
I am an investor. I’ve been working with Judy for years. I’ve probably funded about 20 loans with her. I can count on her to be professional, honest, smart and efficient. It is a pleasure to work with her.
