When a bank turns you down, you may want to turn to a hard money loan. Hard money lenders typically offer no documentation loans with low-interest rates. They’re willing to fund loans within as little as 24 hours. Find out what the requirements are for a Kansas City hard money loan.
The property you’re buying has to serve as collateral for the loan.
The property you’re buying has to serve as collateral for the loan. That means it must be clearly defined—and of a value that’s clear, too. The lender will verify both before deciding whether or not to lend money to you.
A hard money lender will lend to investors, but not owner-occupants.
Soft money lenders are more concerned about the borrower’s ability to pay back the loan since they hate foreclosing on borrowers. They don’t want to be in the business of repossessing houses, so they are more willing to lend money to owner-occupants who have lower default rates. These lenders may also require a down payment and have restrictions on how much of the house you can finance.
Hard money lenders care only about whether or not their investment is safe; that means your credit score and employment history are all but irrelevant. Instead, they will focus on your collateral—in this case, the home that you’re looking to buy. If a lender issues a hard money loan, they will expect a return on their investment, regardless of whether or not you can repay them (although if you don’t pay them back, it doesn’t look great for getting another loan from them in the future). Due to this high risk for loss involved in lending hard money, there’s no such thing as “no-money-down” for these loans; expect to put at least 30% down when borrowing from one of these lenders.
The borrower must have enough cash to cover the closing costs and purchase price.
You (the borrower) need to have enough cash to cover the down payment and closing costs when closing on the deal. Closing costs can vary, but they typically run around 10% of the purchase price. These costs include loan origination fees, title search fees, recording fees, and other expenses.
Don’t forget you also need to have enough cash to pay for repairs or construction once the property is yours!
The borrower must have enough cash on hand to cover the costs of rehabilitation or construction.
When borrowing hard money for rehabbing or constructing a property, it is essential that you have enough cash on hand (or can get enough) to pay for the project. You must have the resources to complete all of the work required by your initial budget. There are a few reasons why this is important:
- The lender will want to ensure that you can afford to finish all aspects of the project as outlined in your plan because they’re lending on the finished value of the house, not just its current state.
- It’s common sense—if you don’t have enough money to complete your project, it won’t be profitable.
- Because hard money loans are short term and often have high-interest rates, you mustn’t use more than 80% of their cost towards building or rehabbing costs. If you do and then can’t repay them in time, those extra costs will add up very quickly!
A smart borrower will meet with an appraiser and provide comps for the property before applying for a loan.
You will also want to meet with an appraiser and provide them with comparable listings of recently sold properties in the area. This can help you determine what value the property could have once it is fully rehabbed.
Once you’ve gathered this information, use it to calculate your exit strategy (your plan for selling the property). Then, provide a detailed estimate of the costs to rehab the property. If a hard money lender believes there is enough equity in the property after rehab, they are more likely to underwrite the loan.
In addition to this data, you should put together a detailed business plan and provide proof of how you plan on making repairs to the home (i.e., contractor bids).
Hard money loans have short terms, typically ranging from six months to a year.
Knowing how much time you have to work on a fix-and-flip project can help you decide whether or not hard money is right for you. Hard money loans have short terms, typically ranging from six months to a year. Interest rates are charged monthly, and the interest rate is higher than a conventional loan. The property’s value is based on an appraisal that considers the After Repair Value (ARV) of the fixed-up property.
Interest rates are higher than those charged by conventional lenders.
To understand how much of a difference that hard money lending interest rates can make, take the following example: you need $100,000 for a project. You cannot get financing from conventional lenders because of the property’s condition. Based on these assumptions, a hard money lender might be able to provide that $100,000 in exchange for 1% above prime and 3 points (4-6%), depending on your track record as an investor. That means you would pay back $104,000 after six months when the loan is due—$4,000 more than what you borrowed because of interest. This may seem like a lot at first glance, but if you only needed the money for six months to fix up your property and get financing through another lender with better rates (or sell the property), then it may have been worth it in the long run.
Research your options thoroughly before applying for a hard money loan.
Before you apply for a hard money loan, be sure to do your research and ask the right questions. Ask your potential lender about:
- The cost of the loan
- Interest rates (which are typically much higher than commercial loans)
- The loan term (how long you have to pay back the funds)
- Prepayment penalties (fees for paying off your balance early)
- Repayment terms (whether it’s interest-only or in instalments with a balloon payment at the end). Ask about additional fees as well, including closing costs and late fees.
The requirements for hard money loans may vary from one lender to the next, but most of them have very similar guidelines. This is so because hard money lenders have a lot more risk involved in lending money than traditional banks and other financial institutions. But they are the best option if you have a poor credit score or you want a prompt loan processing process.