No Income Verification/ Hard Money (Real Estate)
Hard money, sometimes also referred to as "private money", is the term used for loans secured by real estate that are funded by private parties and are typically offered at higher interest rates than an FDIC insured bank. Hard money underwriting guidelines are almost always less invasive and time consuming than the guidelines followed by a traditional bank or financial institution. Borrowers seek hard money loans when they are unable or do not have the luxury of time to wait for financing from more conventional sources. This can be due to a number of reasons, which are discussed in the next section.
Why Borrowers Choose Hard Money Loans
The question often arises as to why borrowers would seek a private money loan for real estate at the high interest rates that private money demands. The immediate assumption is that these are highrisk ventures and the borrowers do not have the credit-worthiness that would allow them to borrow from traditional and conventional sources. There are in fact a wide variety of factors that determine whether or not a borrower would be a candidate for a private money loan. Let's look at several more common reasons below
Quick Funding of a Time Sensitive Loan
Banks and conventional financial institutions frequently take 90 days or more to close a loan due to strict regulatory requirements and a tedious due diligence process that must be adhered to. A hard money lender can often fund a loan within a week.
Reduction of Red Tape and Paperwork Hassles
Traditional lenders require substantially more documentation than private money lenders and have more stringent loan committee processes and guidelines. Borrowers must often submit confidential financial information and complete an abundance of paperwork to find out if a loan will be approved. A hard money lender focuses mainly on one aspect of the loan (collateral) while a bank will scrutinize the credit, financials, job, etc. of a borrower.
Flexibility and Creative Problem Solving
Private money lenders are more creative with complex loan situations. They can offer options like cross-collateralization of other properties or offer more flexible terms than traditional lenders. The property may also have issues that make it difficult for conventional lenders to finance such as the need for improvements to increase the occupancy of a building, or partially completed construction, etc. Additionally, traditional lenders will not lend on raw land due to their strict underwriting guidelines and are known for limiting the amount of investment properties a borrower can have in their portfolio.
Return on Investment
Many borrowers such as builders, rental property investors and property "flippers" have a specific goal in mind when looking for a loan-speed at which they can get their loan funded. These individuals are focused on making a profit and the simplicity and minimal time it takes with a private money lender can far outweigh the higher cost involved for financing. Time is money.
Nature of the Loan and Market Conditions
The constant change in market conditions and laws that govern the real estate market force conventional financial institutions into taking even more time and have become even more conservative with approving loans. Private money lenders on the other hand have the ability to assess the property or project's risk and charge an appropriate fee for the perceived risk. In essence, private money lenders are equity based and the most important component of the loan funding is the evaluation of the real estate. A borrower's past history and level of commitment plays a part in determining the viability of the loan but is not as paramount to the decision-making process.
Borrower Circumstances
Again, these are not just limited to credit problems or a past or current bankruptcy as is most often assumed. There may be tax liens or other liens that need to be paid, or the property may be entering into foreclosure for a variety of reasons. The property may be held up in probate or involved in a divorce or other family situation. There may be unemployment or a medical emergency. The list is endless, but the principle is basically the same; private money lenders lend on the value of the asset first, and the strength of the borrower second. Ultimately, the decision resides with an experienced underwriter to evaluate the "whole story" when evaluating a potential borrower. Private money is used by a wide variety of borrowers ranging from very high net worth individuals to sophisticated real estate investors and developers, all of whom prefer the speed and simplicity of the loan process.
FAQ.
- What is a hard money loan?
A hard money loan is any loan secured by a "hard asset" like commercial or residential real estate. It is sometimes called a bridge loan, private capital loan or private loan. A hard money loan is a first mortgage on investment real estate. A hard money lender looks to the property as the primary collateral as opposed to the borrowers credit score or other factors. A hard money loan is an alternative to a traditional bank loan.
- What types of clients utilize this product?
Our borrowers are credit impaired, time impaired, property impaired, or in need of financing quickly for some reason.
- What property types do you lend on?
General commercial properties: office, retail, mixed-use light industrial, etc... along with residential investment properties nationwide.
- Where does the money come from for a hard money loan?
The funds originate from private investors who are looking to make hard money loans seeking a return on their capital. The source could range from:
- one individual,
- a group where each investor fractionally invests in your hard money real estate loan, or,
- a group of private investors who have already pooled their funds and work with a commercial lending asset manager or loan broker to issue loans to qualified borrowers.
- When is the best time to use hard money?
A borrower may consider a hard money loan instead of a traditional bank lender in scenarios or a project where having access to capital quickly is crucial. However, gaining access to this type of capital comes at a higher cost, for a two main reasons:
- The investor providing the loan is looking for a better return than they can get in the bond market or in a savings account.
- The more risk the investor takes, the higher the interest rate will be for the project. So a 20% loan-to-value (LTV) loan on a fully rented commercial building would be far less risky than a residential rehab loan on a 60% LTV fixer upper purchased at a foreclosure sale.
But remember, everything is negotiable and it is ultimately up to the hard money lender to find an investor willing to accept the risk of the borrower's project. - What is your min/max loan amount?
We lend from 50k to 100 million depending on the property type, location, loan to value, etc...
- What is your max LTV?
70-75% of the value of the property (or purchase price whichever is lower). We do not require appraisals and look at each property (income and sales approach) to accurately determine value
- What type of programs do you offer (interest only, etc...)?
We offer interest only loans along with amortizing loans depending on the needs of the transaction. The loan structure will be determined based on the unique situations of each transaction.
- What are your rates?
There is no formal rate matrix since each deal is so unique. We price each deal aggressively based on the individual needs of the client, property type, loan to value, location,etc... Please call or e-mail us more details and we can provide a no obligation quote for free
- Why can't I just go to a traditional bank lender and get my deal done?
You certainly can, however, banks generally require both strong collateral and a proven history of excellent credit and cash flow. Further, banking institutions may not provide the dual-awesome combination of speed of capital and quick decision making.
Hard money lenders are the opposite of banks. They offer more flexibility and focus primarily on the collateral for the loan and have the ability to fund a loan quickly - which can prove to be a major benefit when you're in the midst of closing a time sensitive real estate deal. - Is hard money only for desperate borrowers?
Not at all! There are many transactions that just don't fit the conventional lending mold, for which hard money loans are better suited. Sometimes, hard money is a preferred means of financing these transactions and allows real estate investors to leverage their cash to invest in multiple deals, instead of just one.
Examples include: commercial bridge loans, land loans, residential rehab or new. - Why use a hard money loan?
A hard money loan is used for various reasons. The number one reason is time. The loan needs to close quickly for whatever reason. Our average close time is 7-10 days (depending on property, location, etc...).
Hard money loans can also be utilized when conventional financing is not an option including credit scores, income statements, etc.. - Are private money lenders out to steal my property?
Most private money lenders have no desire to take your property. They earn their living by servicing your loan on behalf of their investor. If they take your property, the income stream of 0.5% to 1% of the loan amount per year stops; so their incentive is to keep you in the property, and not take it away from you.
- Where will I make my payments?
You may make your payments directly to the private money lender who arranged your loan or to a separate servicing company. Wherever the payment goes, you can expect less sophisticated servicing than you may have experienced with conventional loans. You should not expect a fancy web site to manage your loan. In many cases the servicing may be done on a ledger card or with basic software that doesn’t give the borrower internet access.
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