How Hard Money Loans Go Wrong

Hard money loan deals can go wrong and quickly fall apart. In fact, it can happen more easily bank loans can.

Funds are not a problem for banks but they sometimes are for money lenders. While banks are lending their depositors’ funds which are readily available, money lenders are at the mercy of the private investor to fund the hard money loans to which they have committed.

A private investor could commit to a deal and then back out at the last minute for reasons that have nothing to do with your transaction and could be an entirely personal issue for the private individual investing in money loans (e.g. an illness, death in the family, change of heart, etc.).

Foreclosure is Likely to Happen Faster

Money lenders have less patience because they are working as fiduciary to a private investor who will likely be far less tolerant than a bank when it comes to delinquent payments on the money loans. Whereas it may be customary for a bank to wait 60 to 90 days to foreclose, a money lender may foreclose after 30 days.

You May Not be able to Make the Balloon Payment

You may be able to afford the loan, but you may not be in a position to pay the balloon payment at the time the lender is expecting it.  Missing a balloon payment on hard money loans may enable the money lenders to begin the foreclosure process.

Watch Out for Non-monetary Covenants on Money Loans

You may be able to afford the payment, but you may be required to maintain several different ratios (e.g. debt service coverage) as a covenant to your loan.  If you are in default of that ratio, even if you are making your payment, you may lose the collateral to foreclosure.  If the ratios are mandatory by the lender, negotiate generous cure times, or non-foreclosure provisions if you can.

Loan Rates and Fees Can Change

Until your transaction is closed,  don’t be surprised if there are a few changes.  This has less to do with the hard money lender’s integrity and more to do with the fact that the private money lenders in Maryland is funding money loans through individual investors.  If the deal is quoted with one private hard money investor and that investor backs out, the next investor who does hard money loans and is interested in your real estate transaction may or may not go along with the same terms.

Personal Guarantees

Virtually every hard money lender will require your personal guarantee.  This is standard in the business, but you should be aware that you may be risking more than the collateral secured by the loan.  Review all documents with competent counsel and know what you are signing.  Most private money loans do not come with the same protections that consumer owner occupant loans come with: Caveat Emptor.

If you decide that hard money loans will work for you, you can use our portal to find money lenders who may be able to assist you.

Readmore Private Mortgage Equity

How to finance a Buy, Rehab, and Rent Property

Ok, you’re convinced: rentals are a great strategy for producing income and the Buy, Rehab, and Rent method makes sense for your business model.

Now what? Get your financing!

A great first step is to get pre-qualified for a loan. This allows you to know how much you can spend and helps tighten your search criteria. Note that although “pre-qualified” and “pre-approval” are often used interchangeably, they’re not exactly the same, and neither is final. The loan isn’t technically approved until later, when the property is under contract and you’re about to close.

However, a pre-qualification helps you answer a number of questions up front, from the price point to any gaps you might need to fill in, i.e. working to improve your credit score or securing a bigger deposit. You’ll also get a peek at the process and likely build a relationship with a lender as well.

Next: Find a property.

Nothing happens without a good deal, so it’s time to get to work identifying one! With a pre-qualification in place, you’ve got a solid idea of what to look for. And when you work with a company like ABL, you’ll be educated, too. A local loan officer who understands your business will walk you through potential loan programs and deal economics. This is vital when you’re analyzing properties and negotiating with sellers.

You can search on the MLS with the help of a trusted real estate agent; look online via sites like Zillow, Trulia, or Redfin as well as Craigslist and For Sale By Owner sites; work with a wholesaler; use direct marketing — or all of the above. Most seasoned investors wind up working all of those angles throughout their careers.

When you’ve found a property you want to buy, it’s time to move things forward. One key figure to know is your loan-to-value ratio, which is what the loan is based upon. While conventional lenders typically consider only the property’s as-is condition when evaluating and processing a loan, a hard money lender will evaluate its potential and use a different set of criteria. In short, the hard money loan is essentially secured upon the value of the property more than your personal net worth or credit (though these still count).

This is considered higher risk and the interest rate reflects that. A hard money loan is also a short-term loan, generally due in a year, sometimes two. The idea is to fix the property and sell it or refinance into a traditional loan at a lower rate.

What does this have to do with loan-to-value ratio? A hard money lender will take your After Repair Value (ARV) into consideration, while a conventional lender usually doesn’t. And you will likely be able to finance most of the rehab costs.

You’re still responsible for having some “skin in the game” and will need to produce some portion of the purchase. The amount varies by loan product and property. A lender will sometimes check your credit, but not always. Regardless, it’s imperative that you do your due diligence and have accurate numbers; this will go a long way toward helping you finance that first property and then establishing a reputation as a reliable borrower who a lender will want to do repeat business with.

Before final loan commitment, the lender will want to see the property to verify condition and repairs, and to confirm whether the purchase price and the estimated rehab figures are accurate. In non-traditional transactions, this can happen quickly; while a conventional purchase often takes four to six weeks to close, you can close in 10 days or less with a lender like hard money lenders in Washinton DC

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 in Maryland 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.

Key Takeaways

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.

Readmore What Types of Projects Qualify for Hard Money Loans?

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:

Fix and Flip
Cash-Out Refinance
New Construction

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 lenders in Maryland 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.

Readmore Qualifying For A Hard Money Loan