By definition, private hard money lending is an extremely popular form of short term financing for real estate investors looking to fund fix and flip or new construction projects.
Traditional mortgages tend to place the most importance on the borrower’s credit score, but hard money loans place more emphasis on the value of the asset involved in the specific investment. So what does hard money loan mean? A hard money loan is primarily used as a source of leverage for real estate investors looking to maximize their capital or as a source of financing that can be available quickly in order to capitalize on a time sensitive investment opportunity.
The hard money meaning can be a confusing topic for new, and even some experienced real estate investors. To make things easier, we’ve put together a short list of some of the most common hard money loan questions that we answer on a daily basis. What is a hard money loan and its definition? How can i qualify? Find the answers of questions to as a hard money lender here.
1. Does credit matter for hard money lenders?
Credit is not the main factor when underwriting a hard money loan, but we do pull a credit report. When we check your credit, we are not necessarily looking at your score but rather the trends in your credit activity. A poor credit score is not always a deal breaker, and we’ll speak with you to understand your circumstances. If your credit is recovering from something like a bankruptcy but your recent credit history has been clean, we frequently move past credit to look at the other factors in the loan file.
2. Can I get a hard money loan for a property I currently live in?
Due to various laws and regulations, hard money loans are not available for a primary residence. Asset Based Lending only funds real estate investment projects, and will only loan to an entity (LLC instead of an individual).
3. What is the difference between a hard money lender and private lender?
There are a lot of differences between a hard money lending company like ABL and a private lender, depending on your definition of a private lender. Traditionally, a private lender is a wealthy individual who offers to fund part or all of a project with their own cash. Unlike professional hard money lending companies these private lenders are more likely to run out of money, and have fewer processes in place to assist and protect the borrower. On the other hand, a firm like Asset Based Lending has over $60 million in capital and a proven track record of professionalism and reliability.
4. What is the typical length of a hard money loan?
Hard money loans almost always have a 12-month maturity date, but can be extended depending on the situation. Since Asset Based Lending does not charge pre-payment penalties, many of our borrowers pay off the loan before the 12 month maturity date.
5. What kind of interest and points are involved?
Typical hard money lending interest rates are 9%-14% annually, and 0 to 3 origination points. The origination points are a fee paid to the lender based on the amount of the loan, usually due at closing. It is also worth noting that your monthly payments are interest only until maturity.
6. Will the loan cover repairs if I am trying to fix and flip a property?
Yes! In fact, the majority of our borrowers are real estate investors that have purchased a property and are looking to rehab it and then sell it for a profit. For a fix and flip loan, ABL will fund up to 85% of purchase plus 100% of the rehab costs.
7. Do I need to bring my own money to the table?
Most hard money lenders require the borrower to have some sort of skin in the game and cash reserves. At ABL, we typically require borrowers to bring 15%-20% of the deal cost to the table. In addition to funding part of the purchase for a fix a flip loan, it is important to have enough money in the bank to do things like pay interest and deal with unforeseen project expenses.
8. Do hard money lenders care about the specifics of the project?
Very much! During the underwriting process our loan officers and underwriters will go through all of the deal economics with you to make sure the project is profitable for everyone involved. As a real estate investor you obviously want to make sure you can make a substantial return on your investment, and as a lender it’s in our best interest to only fund projects where everyone can make money.
9. How much money can I get from a hard money loan?
The answer to this question varies significantly based on the hard money lender that you are speaking with. In terms of dollar amounts, ABL’s current loan programs start at a minimum of $75 thousand and go up to around $2 million.
10. What is the process to apply for a hard money loan?
The first thing you do is speak with a Loan Officer about typical hard money loan terms. They’ll discuss the deal economics with you and figure out if the project seems like a profitable project for everyone. If it does, the next thing you’ll do is fill out a loan application and provide some basic documentation like a purchase contract for the property and a scope of work for the anticipated rehab or new construction if applicable. During this time, we’ll also order an appraisal for the property. As the application progresses, our underwriters will collect additional documentation related to the borrower such as cash availability, income statements, and credit reports. We’ll also ask for information regarding the project’s contractor, title history, property insurance, as well as formation and EIN documents for the borrowing entity (since we only loan to entities, not individuals). Once all of this is in order, the loan moves to closing. For a more in depth look at the entire loan process, please check out our how we work page.