Hard Money Lending: A Valuable Financing Option

Hard Money Lending: A Valuable Financing Option

What is "Hard Money"? Most people have heard the term before and are not sure exactly what it means. Don't be confused by the term "Hard Money." The name doesn't mean that this money is difficult to obtain, because in reality hard money loans are some of the easiest funds to procure. Generally speaking, the industry defines "Hard Money" as unconventional asset based lending where the collateral of the loan is real estate. It is considered unconventional because these loans do not meet the traditional underwriting criteria of Institutional Lenders (ILs).

A Hard Money Lender (HML) is typically the ‘lender of last resort’ due to the loan’s unconventional characteristics; fast funding timeline, a borrower’s credit score, loan type, etc. Private--or "Hard Money"--lenders include real estate funds, pension funds, insurance companies and/or private individuals with money available for lending. Some have deep pockets while others have limited resources. Based upon their own criteria, HMLs lend money primarily on a short-term basis, to borrowers who use it for a variety of profitable purposes. These may include the following real estate loan types: bridge, refinance, development, acquisition, rehab, etc. Since Hard Money is more expensive than traditional sources (10%+ interest rate and 2 points+ in origination fees), borrowers should have a significant financial upside for using these sources. These benefits out way the loan cost.

Typical Terms for Hard Money Loans

Terms and requirements for these types of loans will vary from lender to lender. Lenders may charge an upfront application fee, due diligence fee and commitment fee. Make sure to understand these fees when selecting a Hard Money Lender because these fees maybe non-refundable. Generally, a HML will fund a loan for 50% LTV on raw land and up to 70% LTV on the finished product, at an interest rate of 10%+ and for a period of six months to three years. Lenders will also charge between 2 and 10 points as an origination fee, to be paid out of proceeds. Loans can be either interest only or amortized. Some lenders will fund interest, origination fees, rehab money, etc.; others will not. Ultimately, when selecting a HML, borrowers will need to understand how these options fit best into their plans.

Why Is Hard Money a Good Financing Option?

Institutional Lenders (ILs) (i.e. banks, credit unions, etc.) fill a need for cheap money. Everyone is glad they exist and fulfill their need. Borrowers would love to use them on all real estate deals. However, there is a market out there that ILs cannot fund. That is where Hard Money Lenders come in and why they exist. They fulfill a need that ILs cannot fill due to government regulations, stricter underwriting guidelines, lower risk profiles, longer funding timeline, etc.

When deciding whether to apply for a Hard Money loan, here are the top ten reasons to consider:

1. SPEED
Most Hard Money Lenders (HMLs) can fund in less than two weeks after receiving all the necessary documentation, while most Institutional Lenders (ILs) can take 60 days or greater, if at all.
2. LOW DOCUMENTATION REQUIREMENTS
HMLs documentation is often less than the paperwork required by ILs. HMLs still require some documentation but they fund based on the value of the property; it is the asset that is under consideration, not the borrower.
3. NO CREDIT ISSUE
HMLs typically do not require borrowers to have good credit. For example, one client was able to obtain funding even though the borrower had a recent bankruptcy, foreclosure and a FICO score under 500. ILs almost always require a decent credit history.
4. FLEXIBILITY
HMLs give maximum flexibility in structuring the loan (i.e. term, interest reserve, draw schedules, cash out, financing carry, etc.). ILs typically have much stricter terms.
5. GAP/BRIDGE FINANCING
HMLs are usually very experienced real estate lenders who understand that projects do not always follow the given plan. If a gap in funding exists and the loan and supporting documentation make sense, HMLs will typically fund. Whereas, IL’s guidelines are typically not flexible and they turn down gap loan requests if borrowers get off schedule.
6. LOANS TO FOREIGN NATIONALS
HMLs will loan to foreign nationals, as long as, they are secured in the property. Most ILs have difficulty lending to non-US citizens under the terms required.
7. HIGHER RISK PROFILE
HMLs will fund pre-development, church, non-profit and other riskier loans due totheir understanding of the process and value of the collateral. ILs typically will not fund predevelopment loans or make loans to institutions which impact their profile in the community. For example, no IL wants to foreclose on a church; the publicity is terrible.
8. NO PERSONAL GUARANTEE
HMLs do not always require personal guarantees since loans are made based on the value of the property. ILs almost always require personal guarantees.
9. FLEXIBLE LTVS
HMLs decide what Loan-to-Values (LTVs) they will accept based on their affinity for the project, cross collateralization, possible equity participation, etc. ILs have very strict underwriting criteria, which turn down loans from the beginning if the LTV is too high.
10. SUBORDINATE LIENS
HMLs will make loans in a first, second, third or lower position, as long as, the value of the property is there. ILs might do a second, and almost never a third. Typically, ILs want to be in a first position.

Hard Money Loan Expectations

So, you have a good deal with a great LTV and the loan can't go to an Institutional Lender because of bad credit, or need for funding in two weeks or faster. Armed with the knowledge of the value and concept of Hard Money lending, the loan is sent to a HML. The bottom line is that the finance cost will be more expensive than an IL, but the deal will close. Here is what to expect. Each deal is unique; deal terms vary and nothing is set in stone. Lender criteria adjust based on the specifics of each deal, so borrowers will need to be flexible. Here are a few of the expectations to keep in mind when applying for a Hard Money loan:
Title insurance is a must.
All delinquent taxes, judgments, etc. and other liens on the property will typically be taken out of the proceeds unless specifically excluded.
Insurance, typically, will add the lender as co-insured.
Fund control is always set up on construction, development and any loans which have budgets.
Borrower will pay all closing costs, fees, etc. out of proceeds.
Many lenders require the property be put into a single asset LLC, which the loan is made to.
Borrower should be prepared to assign rents.
Interest, in most cases, at least partly will be reserved or prepaid.
Some HMLs require an upfront application fee, due diligence fee and commitment fee. Make sure you understand these fees and how they will be used and if they are refundable.
Almost all lenders require borrowers to have money in the deal. Additional collateral may be required by cross collateralizing other properties to keep the LTV acceptable.
One final suggestion is to try every institutional and conventional lender--first. After understanding that the loan doesn’t fit into their underwriting criteria and the loan request keeps getting denied for various reasons, keep Hard Money Lenders in mind. HMLs are a valuable option for many types of real estate transactions.

Hard Money Lender Directory @ http://www.thenoteservice.com

Congress Approves Economic Stimulus Package

Congress approves economic stimulus package

Washington (ABC News) _ Congress has approved the rebate checks meant to stimulate the economy and President Bush is on board.
Timely, targeted and temporary, the economic stimulus package has been approved and the checks will be in the mail for about 100-million Americans.
“We stand here at the precipice of a fairly severe economic turndown and we must do everything we can to make sure that the severe effects of that downturn are mitigated,” said Sen. Charles Schumer (D-NY).
Individuals earning up to $75,000 a year will get $600. Families making up to $150,000 a year will get $1,200 plus an additional $300 for each child under 17.
In addition, 21 million seniors will get checks for $300, as well as disabled veterans.
“I thank members of Congress for their efforts on this legislation. This bill reflects our principles. It is pro-growth. It is robust and it will get money into the hands of American consumers,” President Bush said.
The plan is intended to get people spending in an effort to rejuvenate the economy.
“We are making history. What has passed the Congress in record time is a gift to the middle class and it shows that the work of Congress understands the struggles they have,” said Nancy Pelosi (D-Speaker of the House).
The checks will start being sent out in May.

Purchase Real Estate for Investments

Purchasing real estate is a good way to invest your money and provide yourself some increased financial security. It's a good way to increase cash flow and offers many profitable investment options. But, if you're new to real estate investing, you may ask, "What is real estate investing all about? What are the benefits to me and how can I get started?" We'll answer all those questions and help you get on your way to investing in real estate now.

What is Real Estate Investing?
Real estate is a tangible, cash-generating asset, much like gold or silver, and appreciates in values just like these precious metals. Being a tangible asset, however, it does not function like a bond or stock that can quickly lose value; it remains an excellent, long-term way to invest.

Real estate investors benefit from financial leverage, using a mortgage to build wealth in a way that other forms of investments do not. Real estate investment has proven to be a powerful method of creating wealth over time and there are three main forms of return-on-investment (ROI): cash flow, return on taxes and appreciation.


Cash Flow
Cash flow represents the most direct type of return, since it is money you can "put in your pocket" right away. Investing in real estate is a way to increase your cash flow. That, in turn, can provide the working capital you need to further expand your investment opportunities and obtain greater financial security.

Return on Taxes
Many investors in higher tax brackets are less concerned with cash return and more focused on the tax advantages of real estate investment. A great tax benefit for the new investor is a first-year, 100% tax deduction for up to $100,000 of business equipment purchased. This would include appliances.

Then there's also the tax benefits of being able to deduct mortgage insurance as well as points paid on a home loan. Click here to read more about Homeowner Tax Deductions.

Appreciation
The largest ROI is typically from home appreciation. Properties can have significant increases in value over time and if you have long-term goals, one option is to buy land without a structure on the property. If you buy property in the path of development, you may be able to sell at a profit in the future, perhaps when you're ready to retire and need more income.

What Are the Benefits to Real Estate Investing?
Renting
Real estate is such a smart investment option because you can maximize your ROI by finding excellent properties that can be purchased at a great price. Some properties may need more work that others, but with a little TLC, it can be turned into a nice rental property. Renting property allows for a steady and reliable stream of cash flow from the rental payments since there is a high occupancy demand for a well-kept and reasonably priced rental property.

Flipping
If renting is not for you, you can also purchase, repair and resell for attractive profit. This is referred to as "flipping" a property and is a popular real estate investment option. If you're handy and ambitious, this option may be a better alternative to renting the property out.

Start Investing in Real Estate Now
Some basic strategies can be used successfully in all real estate market conditions and get you started on becoming a real estate investor:

Do your research: Educate yourself about the differences between renting and "flipping" properties and which markets offer the best opportunity.
Select an area of interest: Choose an area where you think you could get a satisfactory return on your properties. Assess the true value of these properties based on when you expect to rent or sell the property. Keep in mind, the value of a particular house is not solely what it appraises for, but also what someone is willing to pay to rent or buy.
Learn about your market: This will help save you time by avoiding homes that are not worth the investment.
Enlist the aid of a real estate professional: A real estate professional can help you gain a more concise picture of where your interests should lie.
Contact a reputable mortgage lender: A good mortgage banker can help you determine which mortgage options are best for your situation and answer any questions you may have. Whether you decide to rent or flip your investment property, there are some excellent financing options available. Talk with a Quicken Loans home loan expert to determine which financing options are best for your particular investment interests.
Investing in real estate is among the best ways to develop income streams and offers many profitable investment options. Knowing your market and having a plan before you begin to invest is key in your success as a real estate investor. Determine your best interest and take the plunge; your pockets will thank you for it later! If you'd like to know more about financing an investment property, call a Quicken Loans home loan expert today at 800-710-4755.