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Hard Money Lenders 101: What Are They & How To Find Them

When you’re in the business of rehabbing and reselling properties, you know the finding the right lender for the job is one of the most important parts.

Hard money loans are often an ideal solution for real estate investors and wholesalers that have a well-researched plan for an investment property but require financing fast.

Here’s what you need to know about hard money lenders and how to find the right one for your project.

So, let's get right to it! In Hard Money Lenders 101 we'll cover:

 

What Is A Hard Money Lender?

Hard money lenders are private individuals or financial institutions that provide short-term real estate loans that are collateralized by real property, which is considered a "hard" asset. These lenders work with clients such as house flippers, private investors, and developers that work in both commercial real estate and residential properties.

Hard money lenders are used by investors for funding all sorts of properties like single family homes, condos, apartment buildings, and land for new construction. The properties are typically in need of repairs, renovation, and stabilization, which increase the value of the property and turn a profit for the investor.

The lender makes money by collecting interest, points, and fees for their services of lending money to real estate investors, who then leverage that money to make an even larger sum flipping properties. 

Hard money loans aren’t a typical mortgage, and the lenders aren't your traditional lenders. Hard money lenders are often private lenders. They may be investing their funds or provide loans from a collected fund of several investors.

Since their loans are unconventional, they are not guaranteed by federal organizations such as Fannie Mae or Freddie Mac

This also means that the loans don’t have to conform to federal mortgage lending standards or red tape. As such, hard money lenders can usually offer uniquely beneficial terms to borrowers that wouldn’t benefit as much from a traditional mortgage. Someone who wants to buy a property — with the intent of fixing and flipping it — is a good example.

Check out this quick video explaining what a hard money lender is:

 

How Does Hard Money Lending Work? (7 Steps)

Here's how hard money lending works in 7 Steps:

  1. Borrower Applies For A Hard Money Loan
  2. Hard Money Lender Underwrites The Loan
  3. Hard Money Lender Approves The Loan
  4. Project Is Funded And An Origination Fee Is Paid
  5. Borrower Uses The Funds To Complete The Business Plan
  6. Borrower Pays Interest, Points, and Fees
  7. Borrower Pays Back The Lender

#1.) Borrower Applies for a Hard Money Loan

First off, a real estate investor, developer, house flipper, or other real estate entrepreneur finds a great opportunity to add value to a piece of property. Like a smart business person, she raises money from outside sources to fulfill the business plan.

So, she applies for a hard money loan from her favorite hard money lender. This may involve filling out a Uniform Residential Loan Application and an intake form, demonstrating the track record and experience (such as recent houses flipped or rental properties owned), providing details of the project, and more. 

#2.) Hard Money Lender Underwrites the Loan

After the borrower applies for the loan, the hard money lender underwrites the loan. This is a fancy word for evaluating the financial risk of the deal to the lender. 

The approval process consists of pulling the borrower's credit score and credit history, reviewing credit reports, confirming the details provided in the hard money loan application, evaluating the operator's ability to repay in case the deal goes south, ordering an appraisal of the subject property, and reviewing the scope of work.

#3.) Hard Money Lender Approves The Loan

Once the underwriting process is complete, the hard money lender will either approve or deny the loan. If the loan is approved, then the borrower is able to move forward on their prospective investment property with full force. 

#4.) Project Is Funded And An Origination Fee Is Paid 

On the contract closing date, the hard money funds the project according to the agreed-upon terms. Documents are signed and recorded to memorialize this arrangement and secure the include a deed of trust and promissory note.

The trust deed and promissory note secure a private lender's investment by placing a lien on the title of the property. Therefore, if the borrower does not abide by the terms specified in the note, the lender can take back or foreclose on the property to recoup their investment capital. 

#5.) Borrower Uses Funds To Complete The Business Plan

Once the deal closes, the real estate investor owns the property and begins the execute on their business plan. Popular real estate business plans that use hard money are to flip a house, use as an acquisition loan or a bridge loan until permanent financing is available, or to complete capital improvements to a distressed property before refinancing.

#6.) Borrower Pays Interest, Points, and Fees

Of course, hard money doesn't come without an expense! Some folks call it "Hard Money" because the interest rates and fees are hard to believe!

However, when you have a great real estate deal on your hands, the fees can be nominal if you're able to execute.

The points, fees, and interest rates are all negotiable. Generally, real estate investors with experience and track record are able to score lower fees (new investors present a higher risk). Most often, points and fees are paid upfront, then interest is paid to the lender by the borrower in monthly payments.

what is a hard money lender

#7.) Borrower Pays Back The Lender

Once the property is rehabbed and refinanced, or listed on the market and sold to a buyer, then the proceeds of that sale (or refinance) are dispersed to pay off the loan.

The difference between the net proceeds of the sale and the payoff amount to the lender will end up in the real estate investor's pocket. That's how you can make big money as a value-add real estate investor! On the flip side, you can end up owing a lot of money if you don't know what you're doing. 

 

How Do Hard Money Loans Compare To Traditional Loans?

If you’re new to fix-and-flip real estate investing, you might not be aware of the types of loans that are available. While you can certainly apply for a traditional mortgage, that approach often doesn’t work as well for distressed properties.

The process alone can take at least 30 to 60 days with a bank loan or traditional mortgage brokers, which delays closing on the home and starting the rehabilitation part of the project.

By comparison, hard money loans from a qualified lender can take as little as a few days. These are short-term loans that offer you the funding right when you need it but aren’t built to last decades like most conventional mortgages.

As real estate investors, we often get great deals on properties, like single family houses because of our ability to close quickly. For this reason, we're able to capture better deals by going through a private money lender or hard money lender to fund our projects.

The approval process and qualifications for hard money loans vs traditional loans are also fairly different. Hard money lenders focus on your plans for the property, the economics of the project, and your experience as a real estate investor more than your credit score and personal debts.

In either case, the loan amount is based on two scenarios:

  1. Loan to Cost Ratio (LTC): The total cost of the project is considered, including purchase price and rehab cost to fix up the investment property. This loan to cost ratio usually ranges from 70-100% of the project cost.
  2. Loan-To-Value Ratio (LTV): When the loan amount is based on a percentage of the after repair value (ARV), or the market value of the property when it's completely renovated. The loan to value ratio for most hard money lenders usually goes up to about 65-75%.

You'll have to come up with the difference between the loan amount and the cost of the project (aka the "down payment"). Some investors will come up with their own cash, but savvy real estate pros will raise Other People's Money (OPM) via private money lenders.

Expect to pay higher interest rates with hard money loans, compared with a conventional loan where you'll almost always pay a lower interest rate.


Read Also: How To Raise Capital For Real Estate Deals!



What Are Typical Hard Money Lending Rates?

Hard money rates vary from depending on factors like the lender, location of the property, borrower's experience level, property type, and loan term.

hard money lending rates

Hard money interest rates will range as follows, expressed as an annual interest rate:

  • 6-8% --   Excellent Rates
  • 8-10% -- Good Hard Money Rates
  • 10-12% -- Standard Hard Money Rates
  • 12-14% -- Expensive, but Acceptable Rates
  • 14%+ --  Very expensive, keep shopping around!

Remember, you may be paying a combination of interest, points, and fees, so there will be some give and take on the hard money rate in relation to the other fees. 

For example, a hard money lender might charge a house flipper 10% annual interest plus two points.

A point is equal to one percent of the loan amount. So if your total loan amount is $100,000, then two points will equal $2,000. Points are usually paid upfront at closing.  

 

What Are The Benefits Of Hard Money Lenders?

When buying a home to serve as your primary residence, you have a specific list of needs to fill. When you’re buying property to rehab and sell within a few months, however, there is a different list of obligations. 

Hard money lenders can often meet those needs with the following benefits

  • Quick qualification
  • Understanding of the local real estate market
  • A thorough analysis of details
  • Clear terms on loans
  • Minimal underwriting process
  • Ability to move as fast as the investor

Your success as a fix-and-flip or wholetail investor depends on your ability to find a good deal and act on it without delay. A qualified hard money lender has the skill to verify your research and reach a decision within a few days.

Here's a short video with 4 things to look for in private hard money lenders:   

What Are The Disadvantages Of Hard Money Lenders?

While hard money lenders can provide the perfect type of loan for your project, it's important to understand the drawbacks when going with a hard money lender including:

  • High interest rate
  • Will require an appraiser to perform a valuation
  • Short term loans
  • Can't be used for a primary residence
  • Expensive compared to other loans
  • Points and fees will eat into your profit

By knowing the pros and cons of working with hard money lenders, you can ultimately determine if they're the best fit for your specific needs.

 

How To Find A Hard Money Lender

To find a hard money lender, you’ll need to expand outside your local bank, credit union, or even a national bank. Private lending requires more careful research.

The good news is, by investing the time to find a reliable hard money lender, you’ll be rewarded with a financial relationship that you may be able to use now and for future projects.

Follow these tips to discover the best hard money lender for you:

1.) Clarify Expectations

Hard money lenders can only work as quickly as you can. This means you must do your homework. If this is the first time you’ve bought a house to flip or a rental property using the BRRRR method, start by clarifying your expectations for the project:

  • How much of a down payment you can afford
  • The duration of the loan
  • When you intend to sell the home
  • Who you will hire to do the work
  • How much of the rehab work you’re able and willing to do personally

Even if you don’t have a property in mind yet, identifying these details helps outline what you can bring to the table and what is required to make it work.

2.) Search Online

The best way to form a list of hard money lenders is to start researching online. You can always get recommendations from people you know who have experience with fix-and-flip in your area, but it’s not necessary.

Search for hard money loans in your state. Look for an established web presence, because this will help you determine lenders that are most likely to be responsive to your communication.

Always trust your instincts. If lenders feel inconsistent in the information presented or there are lots of complaints about them, keep looking. A reputable lender will put their terms – and fees – in writing. If the lender is hesitant to do so, this could be a sign that the lender is looking to bait and switch, or isn’t a direct lender and is shopping your loan to others that are.

3.) Locate A Hard Money Specialist

Since hard money loans are significantly different from other types of loans or mortgages, it’s crucial to choose a lender specializing in hard money.

Lenders that try to appeal to all kinds of borrowers may offer you a loan that doesn’t address your concerns or create a process that doesn’t work for fix-and-flip investors. Experienced hard money lenders know how to structure a loan to make it optimal for you.

4.) Keep It Local

The hard money lending world is built on speed, which makes getting a loan from a local lender crucial. Someone who has familiarity with your local market will be able to see which deals are hot and which ones are not. 

Keep in mind, hard money lenders are typically more personally invested than traditional banks. Working with lenders in your area also makes it easy for them to inspect the property, confirm property value, and meet with you to sign the paperwork, without days of delay. 

5.) Verify Requirements

Although there are many similarities among hard money lenders, you still need to confirm that you can meet the expectations of the loans they offer.

Reputable lenders will make all of the terms clear from the outset. You should know what to expect as far as down payments, interest rates, loan duration, and even the types of borrowers they consider.

Remember to keep all these details in writing and verify that they remain the same throughout the process. This kind of transparency from the beginning will help ensure you have a trustworthy lender for your real estate investment.

Finding the right hard money lender for your fix-and-flip projects takes research. With these tips, you can know just what to do.

 

What Is A 100 Hard Money Lender?

A 100 Hard Money Lender or a 100% Hard Money Lender will lend the entire cost of a real estate investment project, without any downpayment required from the borrower. These lenders will take on this higher risk loan when the total amount of capital needed is less than their loan-to-value requirements. 

For example, if you need $100,000 to purchase a property, $50,000 for rehab expenses, and the after repair value (ARV) is $250,000, then a 100% lender who lends at 70% LTV may provide up to $175,000 in investment dollars. See why it's so important to find great deals?

That said, 100% Hard Money Lenders will generally charge much higher interest rates, additional points, and require the borrower to front the first construction draw. This means real estate investors will need to come up with the cash to pay their contractors for the first phase of the repair project.

So, while it might sound a bit deceiving to the unprepared, just make sure you confirm these details upfront. 

 

Do Hard Money Lenders Provide Proof Of Funds?

Many hard money lenders will, in fact, provide proof of funds to real estate investors to make offers to purchase investment properties. However, the borrower will need to be pre-approved by the lender before receiving a proof of funds letter.

Think of it as obtaining a pre-qualification letter for a traditional mortgage. You certainly will not get one without submitting your documents, going through a credit check, and receiving a pre-approval first.

 

Best Hard Money Lenders in Florida

We've done the research and found the top hard money lenders for your fix and flip deals in Florida, the Sunshine State, including:

 

Best Hard Money Lenders in California

hard money lender California

For your hard money and bridge loan needs in California, the Golden State, here's our list of the top lenders:

 

Best Hard Money Lenders in Houston

In the metropolis of Houston, Texas, also known as "Space City", we've discovered several of the top hard money lenders with competitive rates, including:

 

Final Thoughts On Hard Money Lenders

Now that we've covered what hard money lenders are, how hard money loans work, and even presented the best lenders in several booming real estate markets, it's up to you to decide if they're right for you. 

What's more important, as we've mentioned before, is knowing how to find incredible real estate deals. A big limiting belief for new investors is that they need money to invest in real estate. The truth is that once you're able to find a great opportunity, the money is there.

We hope you've gained enough from this Ultimate Guide on hard money lenders to go out there obtain all the money you'll ever need to fund your real estate business endeavors.

Keep learning, continue networking, and never stop making good deals happen!

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