Hard money loans, also known as a fast short term loans, are a mortgage alternative to a borrower who is possibly in a distressed financial situation or who has less than perfect credit which fails to meet bank criteria for funding. This asset-based loan financing is secured by real property and loans are typically made by a company or individual from a private organization, also known as “Private Mortgage Investors”.
Below, we will analyze 5 interesting facts about hard money loans that you may not have known.
- CREDIT SCORING
A perfect credit score is not required, although it helps obtain a less expensive loan from a hard money lender if the score is above 640. A credit score is designed to predict the likelihood that a borrower will repay a loan, based on historical outcomes of loans to borrowers with similar characteristics. Although quantitative scoring has been used as far back as the 1950’s, there is no model that can claim perfect predictive power. Borrowers with low credit scores or those who have recent bankruptcies, foreclosures or short-sales in the recent years may have limited options when looking for real estate financing. A Hard Money loan or a Private Money lender operate differently than traditional lenders and offer terms and guidelines unique to a borrower’s particular situation. This may be the solution for real estate acquisition, refinancing and avoiding foreclosures and thus giving you the power to act fast and secure your investment.
- RISKED BASED PRICING
Loans to borrowers with riskier profiles typically carry higher rates than conventional commercial or residential property loans because the higher risk and shorter duration of the loan. Most hard money loans are used for projects lasting from a few months to a few years and often carry pre-payment penalties. The added credit risk is priced profitably so that the hard money lender can be compensated in the event of borrowers default. Lower Loan-to-Value (LTV) ratios may attract lower rates, again representing the lower level of underwriting risk although lender legal fees, origination fees and valuation payments may remain fixed. A hard money loan may be your solution if your credit is less than perfect, sure the interest rate is higher but you have the ability to make a heavily discounted acquisition before it passes. In such cases, a hard money loan actually helps increase your own profits.
- COLLATERAL
Presentation! Presentation! Presentation! A hard money loan is financed based on the collateral value of the property not your personal credit score. While some lenders are genuinely interested in financing your project, be weary of those asking for up-front points and fees. Be prepared to present documents such as personal financial statements, Tax returns, detailed budget for construction, architectural plans for the property, contractor bid sheets for repairs and renovations. Be prepared to prove the value of the particular property by researching price of similar properties in the neighborhood and the history of the market of the neighborhood. Having experience as a real estate developer will also increase the chances of being approved. Present your hard money lender successful real estate projects you have completed in the past. Many Houston hard money lenders will fund 60-70% of the after repair value (ARV) of the project; you may be responsible to fund the remaining. If you have this cash on hand, it will certainly increase the chances of your approval.
- STREAMLINED PROCESS
Since complex bank underwriting guidelines are not involved, hard money loan applications are simpler and can often be approved in only twenty four hours. A ten-day closing period is normal, but in some cases only a few days will suffice. These loans are held by the private mortgage investors and are not sold in the secondary market therefore your payments are made to the same hard money lender every time. Working with a Houston hard money lender that is family owned and that has one decision maker at the helm maximizes their efficiency.
- EXIT STRATEGY
Hard money loans are designed to be paid back quickly, usually 12-60 months depending on the loan type, property type and project involved. If you do not pay back the loan in time and default on the loan, the lender has the option to foreclose. However, most hard money lenders seek to avoid this scenario and will work with those struggling to make the payments. It is imperative that you have an exit strategy, in other words your plan to repay the loan in the event that something unforeseen happens. Some exit strategies include selling or “flipping” of the property, the collateral should have 30-40% equity so the hard money lender can be paid off and allow you to start over. Obtaining a traditional mortgage should be your main goal if you wish to keep it. When you secure a hard money loan this should give you time to rebuild your credit or pay down your existing debts. Refinancing into a conventional loan will have to be arranged, you and the lender want to make sure you qualify for a conventional financing.
It is important to know that hard money lenders operate differently than traditional lenders and this may be a solution if your credit is less than perfect. Bear in mind hard money loans are a great temporary solution for you when other options are not available.
For over 25 years, AMI Lenders has been providing financing to individuals in the Houston and surrounding areas seeking to obtain a hard money commercial or residential loan. And if we can’t help you ourselves, we’ll do our best to help you find someone who can.
Please give us a call at 713-682-4400 and ask for Jim, Jeff or Joe Emerson. We are always here to help!
