You’ve found the perfect house to buy and flip. You’ve done your due-diligence, made your offer and got the property at a great price as long as you pay “cash” and close quickly, but you don’t quite have enough money on hand—now what?
Hard money loans help flippers in this exact situation. They are meant to aid flippers who need to close quickly and not jump through the hoops of a traditional bank loan. So, how can you get a hard money loan? First, you’ll need to make sure your team and your project qualifies.
Who Can Qualify for Hard Money Loans?
Unlike traditional bank loans, the primary factor hard money lenders are looking at is the overall profitability of the deal the investor is considering. Banks place tremendous focus on both the property as collateral and the buyer’s creditworthiness because they are lending as much as 97% of the property’s value. If the buyer fails to make their mortgage payments, the bank stands to lose money due to the high Loan-to-Value or LTV.
While a hard money lender wants to understand who they are lending to by reviewing the flipper’s experience, cash-on-hand, income and credit, their focus is more on the property itself. They will carefully review the value of the property, the extent of rehab that is planned for the home, and who the contractor is doing the work. As a result, hard money lenders will de-emphasize the credit and income profile of the borrower as a qualification for the loan.
What Types of Projects Qualify for Hard Money Loans?
Generally, hard money lenders require their borrowers to form some sort of entity (usually an LLC), rather than borrowing as an individual consumer. So, it’s important that you make sure your purchase contract is assignable to an entity or the contract is originally in the name of an entity that you have previously formed. Additionally, almost all hard money lenders require the property to be non owner-occupied. This means that for the duration of the loan, the borrower cannot be living in the property covered by the loan. Next, you have to check with the hard money lender to see if they lend in the particular state that your property is located. Most hard money lenders do not lend nationwide and many only focus on one state.
The following are good examples of programs that a great hard money lender will engage in:
The fix and flip is a popular revenue-generating strategy that involves the purchase of land or property, the development or renovation of it’s current status, and it’s resale at a price higher than the sum of the total project costs. Cash out refinance involves refinancing an existing mortgage loan, where the new mortgage loan is for a larger amount than the current loan – so you (or the borrower) receive the difference between the two loans in cash. The term “new construction” is typically used to describe a house that is currently being built or has been completed but has never had any occupants.
Each potential project contains its own set of circumstances, so it is important to contact the hard money lender to understand if your particular project will qualify. But, when you contact the lender, be sure to have all of the relevant facts of your deal readily available.
How Quickly Can I Get a Hard Money Loan?
It is possible to score a hard money loan very quickly! This is one of the great benefits of choosing a hard money lender versus a traditional bank. The first step is to gather together all of your deal points and fill out an application. Within a 10-minute conversation with the lender, assuming you present the circumstances of your plan in a clear and organized fashion, they should be able to tell you whether or not it seems like a deal they are interested in funding. After submitting an initial application, and depending on the lender you are dealing with, your loan will go through an underwriting process in which the hard money lender will review the contract, the proposed scope of work, overall deal structure and value, and any other pertinent information you provide them with. The lender will want to involve an experienced appraiser to inspect and appraise your property as you proceed with the loan process, so as to avoid any misjudgments and to make your loan process more accurate and smooth.
Once the underwriter approves the loan, the hard money lender is able to push the loan into the closing process immediately, which will be held at a title company or attorney’s office. If you have all of your affairs in order, the typical hard money lender can get through the entire process and fund within two weeks, but some are capable of closing as quickly as 2-3 days.
How Much Money Can I Get with a Hard Money Loan?
Lending amounts will vary from lender to lender. The overall amount of money in a hard money loan also varies depending on the details of your contract and specified need, but generally falls between $75,000 and $2,000,000 for a residential project. In addition to the amount you can expect, it is critical to understand what LTVs a hard money lender will go up to. A solid, trustworthy lender may lend an entity looking to fix and flip a property 80% of the acquisition cost and 100% of the rehab costs, up to a maximum loan to After Repair Value of 65%.
For example, imagine you find a property to purchase for $100,000 that will be worth $180,000 after investing $30,000 into the rehab. You can expect the lender to lend you $80,000 to purchase the property and another $30,000 to rehab it. However, since a lender like ABL has the loan amount capped at 65% of the ARV, the total loan proceeds will be a max of $117,000. Remember that hard money lenders will generally want flippers to have some of their own cash in the deal to insure that everyone has “skin in the game” regardless of how great of a deal you find.
All in all, when considering a hard money loan for your project, it’s important to keep in mind whether yourself, your project, and your time frame will qualify your for a hard money loan. If for some reason you do not meet some of the qualifications discussed above, it may be time to look into other funding options. Hard money loans are well known for their speed and flexibility, and they may be the perfect leverage for you to use in order to avoid the predicament that many house flippers find themselves in when they don’t have enough funding on hand for their desired project.
If you’re looking for a hard money lender, talk to us at Asset Based Lending. We are a hard money lender that provides fast bridge financing to real estate investors for the purchase and renovation of single family, multi-family, and mixed use properties. Contact us today to see if you qualify!