An Analysis of Hard Money Loans
If you think that hard money lenders are gangsters that will charge you at least 100% interest rate every month and will ruin your life if you refuse to pay, then perhaps you are watching too much TV. You might be surprised that the hard money lenders are playing an important role in financing different types of real estate investing particularly house flipping. Hard money loans are type of loans that an investor can secure on non-conventional lenders. The amount that you will receive is primarily based on your credit and value of assets.
Hard Money Loans and House Flipping
Compared to the traditional forms of loans, the hard money loan comes with higher interest rate shorter terms and also higher fees. However, it comes with a quicker approval process that is essential when investing on real estate. Additionally, this type of loan relies on the type of property whereas the traditional loan will rely on the credit of the borrowers. When looking for hard money loans options that you can use for flipping houses, remember that different lender may look at things differently. For instance, they may have different loan structures, borrower requirements, and criteria.
In terms of residential hard money loans, most lenders will provide you with 80% of your purchase price or 65% of the property’s after-repair value or ARV. For instance, if you are purchasing a property that amounts to $250,000 and you are spending a total of $50,000 for the rehabilitation and development, and you are planning to sell the property for $357,000, then you will probably receive an average loan of $225,000. As we mentioned above, lenders may have a different take on this matter.
Aside from the fund that you will use during your initial purchase, some investors may choose to reserve a portion of their fix and flip loans that they can use for future advances. This portion is referred to as holdback. Holdback will provide the house flipper with a steady flow of cash by letting them extract the equity of their current project.
Cost of Hard Money Loans
In terms of loan pricing, the average type of hard money lenders will charge the borrower with a 10-13 percent annual interest rate. It also comes with a loan fee that amounts to 4%. However, aside from these origination fees, there are also lenders that will charge you with reconveyances, recordings, inspections, loan documentation, appraisals, and credit checks. One tip when looking for a fix and flip loan is to look beyond the loan and rate fee. Look at the junk fees that have a significant impact on the overall cost of your loan.
Finding your ideal lender of hard money loans is more than just the lowest fee and interest rate. It is absolutely important to pay attention to the principle of the company and consider the things that they can deliver. You need to safeguard your business and ensure that you are only dealing with a reputable lender.