Nationwide Hard Money Lenders
May 4th
Nationwide hard money lenders are companies and brokers who can locate and/or fund hard money loans in most of the states in the US.
As a rule conventional consumer mortgage lending happens on the state level. Most states have their own licensing requirements and regulations for lenders when it comes to making consumer loans.
However, commercial mortgage lending, i.e, lending to individuals and companies who buy, own, manage and sell real estate with intent to make a profit is a lot less regulated by states and on federal level.
This allows some hard money companies to offer hard money loans nationwide directly, or through satellite hard money loan originators locally. Nationwide hard money lenders will likely have different origination costs, interest rates, Loan-to-Value (LTV) ratio requirements in different states. These differences relate to the nationwide lenders perception of the where the market is locally and allows them to mediate the risk they’re taking in a particular local real estate market.
The biggest difference will be the LTV nationwide lenders use to determine safe mortgage loan limits in different states. In states with healthier real estate markets these limits could be as high as 70%-75%. At the same time in states with depressed real estate they could go down to 60% LTV or even lower. Some states with particularly distressed real estate could be completely excluded from the nationwide hard money lending program.
Nationwide hard money lenders tend to have a pretty good grasp on how different states stack up based on the volume of loans and the ratio of bad loans they have on the books in each state. This data allows them to determine how aggressive they should be marketing their hard money loans in each state or target market to real estate investment community.
Nationwide hard money lenders tend to market their services at large real estate conventions and seminars, through local investor groups and through variety of online forums for investors.
Private Money Lenders
May 4th
Private money lenders is a collective name used to call all non-institutional money lenders. Private money lenders are companies, brokers and individuals that are not a part of the banking industry, credit unions, mortgage lenders and traditional finance community.
Some of the representatives of private money lenders are hard money lenders, hard money brokers, pawn shops, private finance companies, hedge funds, pension funds, insurance companies and individual private investors.
These private money lenders are predominantly involved in originating investment loans secured by real estate. Real estate loans offer private money lenders a highly potent combination of good rates of return coupled with a solid collateral for loans.
Even though private money loans can be secured by other assets (stocks, bonds, business assets, accounts receivable, equipment, notes, etc.) - real estate loans are the most common kind of loans private money lenders make.
Individuals who become private money lenders can loan their personal funds. They can also make loans from funds they manage in a self-directed IRA through a custodian of their IRA account.
There is often a big difference in costs of private money loans obtained directly from individual private lenders vs hard money lenders or private money brokers.
Individual private investors who lend money on real estate usually don’t charge origination fees and also loan their money at a lower interest rate. Since there is no middle man, all interest paid by borrowers on a private money loan goes directly to the private lender.
Moreover, the duration of the private money loan and other terms can be worked out between the individual private money lender and the real estate investor borrowing the money – to help create a loan that benefits both parties the most.
On the other hand, the hard money lenders are companies that market their services to wealthy individuals to raise money from individual private investors. They target rich clients who don’t want to deal with borrowers directly. The private hard money lenders recruit private individuals to invest their money at a certain rate. Then they turn around and loan these money at a higher rate to real estate investors and make a spread profits on the difference in the rates.
They also charge high origination fees (points) on the top of the hard money mortgage loan. For private hard money lenders high origination fees represent a large profit center. Therefore it’s in their interest to keep the terms of the loans short and force real estate investors to refinance the loans quickly. Then the money could be re-loaned to another party and a new origination fee could be generated.
They offer the same “canned” terms to all real estate investors and manage the entire loan origination process completely shielding private investors from individual borrowers.
One of the most dangerous to the private investors aspect of making private loans through a private hard money lender company is indirect transactional relationship. I.e., the borrower gets a loan from the private hard money lender. While the private investor who put up the money for the loan, in turn, gets a note from the private lender company secured by the real estate note from a borrower. In other words, the private investor with the cash in the loan doesn’t get the real property as a direct collateral for his loan.
The lender has the right to foreclose in case of default, while the private investor will have to collect from the lender using his note in case something goes wrong.
Private Investors
May 4th
Private investors are individuals who have money they are seeking to invest at good interest rates in a safe and secure manner.
Usually private investors look for projects that offer them investment alternatives that pay better than what is available from banks in CDs (certificates of deposits), and safer than what’s available in the stock market, or other unsecured financial investments.
Private investors are often willing to work with entrepreneurs to fund their projects. Many private investors are open to looking into a wide variety of projects: start-up businesses that need capital to develop and grow, ongoing businesses that have accounts receivable and are trying to manage their cashflow or expansion plan better, money for equipment or technology, unconventional funding (church loans, for example), etc.
Private investors don’t usually like to fund consumers purchasing items for their personal use. The primary reason is the state and federal laws governing these type of financing are very strict and are designed for institutional investors, not private investors.
Because real estate provides a combination of good rates of return along with a tangible security, the easiest projects to get financed through private investors are in the real estate arena. These are most often structured as real estate mortgage loans with private investor being the lender and a real estate investor being the borrower.
The private mortgage loans offer a good security to a private investor in the form of the real property collateral. If the borrower getting the money defaults on the payment of the loan, the private investor will be able to foreclose, repossess the property and recover his money through a resale of the property.
Often, if the loan was made at a low enough Loan-to-Value (LTV) ratio, like 70%-80%, the property will be purchased at the foreclosure sale by foreclosure investor. In this scenario, private investor who loaned the money secured by real estate won’t even have to wait to list and resell the property. He’ll get all his money right after the courthouse auction.
Getting a loan from a private investor is a lot simpler than getting mortgage loan from a bank or a traditional mortgage company. Unlike the rigid requirements and qualifying guidelines used by traditional mortgage lenders that only want borrowers who have high credit score and strong financials, usually borrower’s credit and financial strength is not something a private investor will review when deciding whether to loan money on a project.
The primary factors a private mortgage lender will rely most upon are:
Collateral – it must be worth a lot more than the amount of money the private investor will be loaning out, and it has to be relatively easy to liquidate.
Experience and track record – the borrower must convincingly demonstrate to the private investor why the project has merits and why he (borrower) has the capacity and know how to see it from the beginning to completion.
Exit strategy – the private lender must see how the borrower intends to exist his project and replay the principal amount of the loan and any remaining owed interest at the end of the loan term.
Hard Money Loans
May 4th
Hard money loans are a form of financing, primarily, mortgage real estate financing, designed for projects that are difficult or even impossible to fund in any other way.
There are many borrowers who can’t be approved for a conventional mortgage loan financing by bank or mortgage company due to borrower’s credit history and financials. That doesn’t mean there are no loans available for such individuals, as long as they have a property that provides ample security for the repayment of the hard money loan.
Hard money loans carry high origination costs, often referred to as “points”. The amount of points varies quite a bit from lender to lender with an industry average being in the range of 3-5 points. The point is a 1% of the loan balance that is being originated by a hard money lender. For example, if a private lender charges 5 points to give you a $100,000 hard money loan, you’ll pay $5,000 in these loan origination costs.
Some hard money lenders allow the points to be rolled into the amount borrowed on the hard money loan. Others require points to be paid by borrower out of pocket.
You can count on the hard money loan interest rate to be at least 4%-5% higher than the prevailing mortgage interest rates. The industry average hard money rates are in the range of 12%-15%.
In the past, residential hard money lenders didn’t mind repossessing a property used as a collateral for a hard money loan when the borrower defaulted on the loan. These days with slow real estate markets, hard money lenders substantially changed their stance. Hard money loans today are looking a lot closer to the conventional loans from the banks and mortgage companies in terms of amount of scrutiny the borrower and the project gets.
Moreover, in the past hard money lenders were only looking to the Loan to Value (or LTV) on property when deciding whether the hard money loans is safe. The borrowers didn’t have to bring money to closing as long as the purchase and the closing costs could fit into the lender’s desired LTV.
I.e., if you could find a $100,000 house that you contracted to buy for $58,000, you won’t have to come up with cash out of pocket to close, as both the purchase price and the closing costs would be covered by the 60% LTV, or $60,000 hard money loan.
Nowadays, while the hard money lenders still quote the LTVs, the “V” in LTV no longer stands for “Value”. Rather it stands for the lower of Value or purchase price you’re paying. I.e., if you’re buying a $100, 000 home for $60,000, the hard money loan you can get is going to be 60% of the purchase price. Yes, you’ll only get $36,000 hard money loan, not $60,000 as you could before.
And guess who has to come up with the difference for a down payment of $24,000 plus the closing cost? You do! Welcome to new World of residential hard money loans in times of slow economy and slow real estate markets.
Residential Hard Money Lenders
May 4th
Residential hard money lenders specialize in providing short term mortgage loans for residential real estate projects, like lots, homes, home construction, home rehab, as well as short term loans on small investment rental properties like homes, duplexes and fourplexes.
Small real estate investors often seek out residential hard money lenders to get bridge loans to fund difficult projects. Hard money lenders who specialize in residential properties are the most commonly used, easy source of money for investors for acquisition and rehab of houses. These real estate investors purchase run down condos, homes or small apartment properties of up to 4 units in bad need of repairs, remodel them to bring them to a top shape and either rent long rent term for ongoing cashflow, or put them back on the market and resell for a profit.
If the property is in a bad shape the bank normally wouldn’t provide the traditional rental property loan until it’s completely fixed up and ready for occupancy. Residential hard money mortgage lenders play an important role, as they offer investors the alternative – a bridge hard money loan financing to let them purchase the property and finance most or sometimes even all of the rehab work on it.
A big advantage of getting money from a residential hard money lender is speed. Often the investor needs money “yesterday” to be able to take advantage of a great buying opportunity: a pre-foreclosure, repossessed property, or an estate sale available at a highly discounted price.
A traditional lender is not match for a residential hard money lender in terms of being able to speed up the loan approval process and get the money ready for closing in just several days the investor has to perform on the purchase contract.
A big disadvantage of dealing with the hard money lender on a residential property is high cost of hard money loan origination as well as high interest rate.
In the past residential hard money lenders were pretty lenient when it came to approving borrowers without much scrutiny for credit history or financial strength. It all has changed in recent years after the collapse of the residential mortgage industry in 2008.
Today even residential hard money lenders thoroughly check borrower’s financials, credit score, credit history, level of experience with rehabs, amount of cash available to carry the project through until the refinance of the residential hard money mortgage loan, and many other things that affect borrower’s performance.
Commercial Hard Money Lenders
May 4th
Commercial hard money lenders are a group within the larger hard money lenders community that specializes in providing short term bridge loans for commercial real estate projects.
When commercial properties change hands, in order for a buyer to obtain permanent mortgage financing the property must show certain level of occupancy and rental income. Most institutional lenders usually require about 85% or higher occupancy before they consider the property “stabilized”.
If the occupancy rate in the property is below 85%, the property usually operates at a loss. I.e., operating expenses exceeds the income. This situation poses a substantial risk to an institutional lender and usually falls outside of lending guidelines for most conventional commercial property lenders.
Enter commercial hard money lenders. These are private mortgage financing sources that recognize there is a sizeable market for bridge financing in the commercial properties arena. Commercial hard money lenders make loans on both, stabilized and non-stabilized properties, for both purchase and refinance.
For stabilized projects commercial hard money lenders usually offer short term acquisition mortgage financing. These commercial hard money loans allow an astute buyer to acquire a commercial property with good occupancy rates and cash flow at a well below market price without having to jump through many hoops that the institutional commercial lender would require.
For non-stabilized properties commercial hard money mortgage loans allow buyers to acquire distress properties with high vacancy rates that have high property potential as a turn-around project.
Non-stabilized properties usually don’t meet lending guidelines of most lenders. Therefore, a bridge loan from a commercial hard money lender is often the only way to acquire the property for a buyer who lacks the cash.
As the property goes under the new management, the buyer has a chance to improve the curb appeal, update systems and look of the property and attract new tenants, often at a lot higher rental rates. Once the vacancies are leased up and the property is stabilized and producing good cashflow, the commercial hard money loan served its purpose. It can be retired and replaced by a long term institutional mortgage financing form one of the more traditional source like bank, insurance company or pension fund.
Bridge Loans
May 4th
Bridge loans are temporary loans that provide financing for a relatively short term. Usually the purpose of bridge loans, as the name implies, provide the financial bridge. I.e., to get a borrower from point A, where he needs some money now but can’t get permanent financing, to point B where he will be in the position to obtain more conventional financing and replace the temporary bridge financing.
One of the common situations when bridge loans are used is when the permanent financing can’t be obtained at all. For example, during a construction period, when a property is being build on a piece of land, the permanent financing is often not an option because there is not an adequate security available to the lender.
Yet temporary bridge construction financing can be arranged when the money is released to the borrower in stages as the project is being constructed. This money could be used to pay the general contractor and crew as they complete various stages of the project. When the entire project is finished and ready for occupancy, the bridge loan will be replaced with the long term permanent financing.
Bridge loans are often used by real estate investors who’re buying run down properties in order to fix them up and resell. If the property is in a bad shape the bank normally wouldn’t provide the traditional rental property loan until it’s completely fixed up and ready for occupancy.
Therefore, the investor has to find alternative bridge loan financing to let him purchase the property and finance most or all of the rehab work on it, before either reselling it or refinancing it with the long term loan.
A typical source of bridge loans for real estate investors are hard money lenders.
Hard money lenders who offer bridge loans to real estate investors often charge premium origination fees and interest rates, as well as high renewal fees to offset for the risk such projects entail.
Hard Money Mortgage Lenders
May 4th
Hard Money Mortgage Lenders is a common name used for several groups of lenders who make loans that rely less on the borrower’s credit, financial strength and formal qualifying… and more on the asset or multiple assets used as a security or a collateral for the loan.
In that regard hard money mortgage lenders are quite different from traditional lenders like banks, mortgage companies, credit unions and finance companies. The latter use borrower’s credit score and financial statements as the primary and often the only loan qualifying criteria, except in case of real estate and auto loans.
It’s not a surprise that hard money lenders are often also called ‘asset based lenders’ to indicate the assets securing the loan are of utmost importance in getting the loan approved.
Hard money mortgage loan is the loan made by a hard money lender that primarily relies on collateral as a security for repayment.
One of the biggest advantages of using hard money lenders is a speed of getting financing for your project. Often a hard money mortgage loan can be financed and closed a lot faster in a streamlined fashion compared to getting a mortgage loan from an institutional lender. That’s why hard money lenders are often used for projects that require quick funding, or when no conventional financing is available at all.
A typical hard money mortgage lender wants a low risk loan. The risk is mitigated by a low Loan-to-Value (LTV) ratio for his loan, usually less than 70% and often even less than 60%. That means if you’re pledging an asset worth $100,000 as collateral for your loan, you’re likely to get a loan that doesn’t exceed 60% of the value of your collateral, in this case $60,000.
In recent years with slow down in the economy and softening of the real estate markets, hard money lenders mortgage lenders, i.e., hard money lenders making real estate loans have become even more conservative.
Hard money lenders often make bridge loans, short term loans to get the borrower from point A to point B financially. I.e.,
Residential hard money mortgage lenders are hard money lenders that specialize in real estate loans for residential real estate. These loans cover purchases and refinances of residential lots, homes, duplexes, tri-plexes and four-plexes.
Commercial hard money mortgage lenders specialize in mortgage loans for commercial real estate. These include loans for commercial land development, acquisitions and refinances of commercial properties like storage facilities, office buildings, apartment complexes and warehouses.
Private money lenders and private investors are terms often used interchangeably with hard money lenders to describe lenders who are not a part of the institutional or conventional financial world of bankers and credit unions. Yet these private lenders have an ability to provide financing for projects that conventional lenders usually won’t touch.