A hard money loan can be a good option for a variety of reasons. For example, if you’re having trouble getting a loan from a bank with the terms you need, you need quick approvals and/or funding, you’re looking for tailored loan solutions, and/or you don’t want to bring in an equity partner.
Now, let’s talk about what you should know before looking for a hard money loan, and ways you can ensure a quick and easy loan process.
Know which loan type is right for you.
You can get a hard money loan on most property types, including single-family homes, multi-family, commercial, land, and industrial.
Some lenders specialize in just one or two loan categories; therefore, we recommend asking lenders upfront about what property types they are willing and able to fund. Most hard money lenders will not lend on owner-occupied properties, for instance, because of extra rules and regulations. This means lenders may not fulfill your loan request if you plan to reside in the property.
It’s also important to understand which loan type is best for your project. If you’re looking for a loan to assist with the purchase of development-ready raw land or for improvements to existing buildings or infrastructure, an acquisition and development (A&D) loan would be best. For raw land that needs to be made construction-ready, or for soft costs and entitlements, you should seek a land development loan. Construction loans are best when you’re looking to cover the cost of building various real estate projects. The recommended loan for major renovations to your property is a redevelopment/heavy rehab loan.
Understand hard money loan interest rates and points.
Most lenders charge both interest and upfront or exit points on the loan. You can expect bank loan points to range from 2 to 10 percent of the total loan amount; the exact cost depends on your specific situation as the borrower as well as the lender’s guidelines.
Compared to a bank, hard money lenders take on more financial risk with the loans they originate. Due to this increased risk, private money interest rates are often higher. This means that hard money lenders may be more expensive than banks; interest rates for hard money loans range from 9 to 18 percent. These rates will vary depending on the lender and region in which you’re operating.
It’s important to remember, however, that while hard money loans may be more expensive than a bank, they are less expensive than bringing in a new equity partner. In many situations, an equity partner can take upwards of 50 percent of the profit, which is well above a lender’s interest rate.
Calculate your Loan-to-Value (LTV) ratio
A loan-to-value (LTV) ratio is what lenders use to determine the risk they’re taking on. You can calculate your LTV by dividing the loan amount by the value of the asset, and then multiplying by 100.
LTV = (Amount owed on the loan ÷ Appraised value of asset) × 100
Most hard money lenders will lend up to around 65% LTV or property value. There are some lenders, however, that will lend on after repair value (ARV) which is the estimated value of the property after it has been improved. This could increase your interest rate and/or points because it also increases the lender’s risk on the loan.
Be prepared with the necessary documentation.
Most hard money lenders are more concerned with the amount of equity you have in the property, versus, let’s say, your credit score. Lenders focus on the equity and property value as a whole.
Hard money lenders are also concerned with how you ultimately intend to pay off the loan. Be prepared to provide lenders with your exit strategy. We recommend having a few backup plans that could be easily implemented if needed.
Banks typically want a large amount of documentation and paperwork. Hard money lenders, on the other hand, usually require much lighter documentation.
So, what types of documents are needed? Documents include, but are not limited to:
As with any type of loan, a Purchase and Sale Agreement is required. If the property is being refinanced, a payoff statement showing the outstanding loan balance can be required.
Preliminary title report
To show a clear title to the property.
Impacts whether you’re approved and the rates and terms you will receive.
Most recent tax returns
Proof of funds to ensure your debt-to-income ratio remains below a certain level.
Proof of insurance
For any property being purchased or refinanced.
For construction/development loans, lenders would also need:
Building plans, specs, and architectural renderings
Name of the licensed contractor
Contractor agreement inclusive of a completion guarantee
Hopefully, this article has prepared you with the knowledge and confidence needed to consider a hard money loan to fund your next project quickly and efficiently. Higher interest rates may seem overwhelming at first, but the benefits of flexible loan structures, higher LTVs, and getting a loan funded quickly can far outweigh the extra cost.
Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation, or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one of our lending experts today.
Broadmark Realty Capital lends in Denver, Florida, Georgia, Idaho, Maryland, North Carolina, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, Washington D.C., and Wyoming.