A Hard/Private money loan is simply a short-term loan secured by real estate. They are funded by private investors (or a fund of investors) as opposed to conventional lenders such as banks or credit unions. The terms are usually around 12 months, but the loan term can be extended to longer terms of 2-5 years. The loan requires monthly payments of only interest or interest and some principal with a balloon payment at the end of the term.
The amount the Hard/Private money lenders are able to lend to the borrower is primarily based on the value of the subject property. The property may be one the borrower already owns and wishes to use as collateral or it may be the property the borrower is acquiring. Hard/Private money lenders are primarily concerned with the property’s value rather than the borrower’s credit (although credit is still of some importance to the lender). Borrowers who cannot get conventional financing due to a recent foreclosure or short sale can still obtain a Hard/Private money loan if they have sufficient equity in the property that is being used as collateral. When the banks say “No”, the Hard/Private money lenders can still say “Yes”.
A borrower can get a Hard/Private money loan on almost any type of property – including single-family residential, multi-family residential, commercial, land, and industrial. Some Hard/Private money lenders may specialize in one specific property type such as residential and not be able to do land loans, simply because they have no experience in this area. Most Hard/Private money lenders have a specific niche of loan they are most comfortable with. Ask them upfront which type of loans they are willing and able to do. Many Hard/Private money lenders will not lend on owner-occupied residential properties due to the extra rules and regulations (thanks Dodd-Frank!) but there are those who are willing to wade through the paperwork with the borrower. All Hard/Private money lenders will do loans in 1st position, while fewer will do 2nd position due to the increased risk for the lender.
Real estate investors choose to use Hard/Private money for many different reasons. The main reason is the ability of the Hard/Private money lender to fund the loan quickly. In most situations, Hard/Private money loans can be funded within a week. Compare that to the 45 – 90 days it takes to get a bank loan funded. The application process for a Hard/Private money loan generally takes three (3) days and, in some cases, a loan can be approved within 5 additional days. Good luck hearing back about a loan approval from your bank within the same week! The ability to obtain funding at a much faster rate than a bank loan is a significant advantage for a real estate investor. Especially when the real estate investor is trying to acquire a property with many competing bids, a quick close with a Hard/Private money loan will get a sellers attention and set their offer apart from the rest of the buyers offering slow conventional financing. Another reason a borrower may choose to use a Hard/Private money loan is that they have been rejected by the banks for a conventional loan. Life doesn’t always go as planned. Short sales, foreclosures, credit issues… they happen. Another important thing banks need to see is income history. If a potential borrower recently started a new job, the bank may deny the loan request due to insufficient income history, even if the borrower makes a healthy income. Hard/Private money lenders are able to look past these issues as long the loan be repaid, and the borrower has enough equity invested in the property.
The interest rates and points charged by Hard/Private money lenders will vary from lender to lender and will also vary from region to region. For example, Hard/Private money lenders in California generally have lower rates than other parts of the country since California has many Hard/Private money lending firms. Increased competition leads to a decrease in prices. Hard/Private money lenders take on more risk with their loans compared to a conventional bank loan. Due to this higher risk involved on a Hard/Private money loan, the interest rates for a Hard/Private money loan will be higher than conventional loans. Interest rates for Hard/Private money loans range from 10 – 15% depending on the specific lender and the perceived risk of the loan. Points can range anywhere from 2% of the total amount loaned. The interest rates and points may vary greatly depending on the loan to value ratio, location, tenant credit, and lease term.
The loan amount the Hard/Private money lender is able to lend is determined by the ratio of loan amount divided by the value of a property. This is known as the loan to value (LTV). Many Hard/Private money lenders will lend up to 65 – 75% of the current value of the property. Some lenders will lend based on the after-repair value (ARV) which is the estimated value of the property after the borrower has improved the property. This creates a riskier loan from the Hard/Private money lender’s perspective because the amount of capital put in by the lender increases and the amount of capital invested by the borrower decreases. This increased risk will cause the Hard/Private money lender to charge a higher interest rate. There are some Hard/Private money lenders who will lend a high percentage of the ARV and will even finance the rehab costs. This may sound great from the borrower’s point of view to begin with, but these types of loans have a much higher risk involved and the interest rate and points will be MUCH higher. Expect 15 – 18% interest and 5 – 6 points when a lender funds a loan with little to no down payment from the borrower.