Facts, Fiction, and the Fantasy of Real Estate

It seems everyone these days is interested in hard money. With the secondary market shrinking, foreclosures up 10%, lending restrictions in subprime becoming an industry standard, and the FBI cracking down on illegal and unethical lending practices; more and more borrowers have found salvation in hard money.

Often times the advantages out weigh the disadvantages, namely the short term and high closing costs.

 What will follow will break down the general rules of hard money lending so you will have an idea of what to expect if you are in the market, or you can use as a reference if you happen to be in the industry and speak with someone that is in the hard money market and needs more information.

 First and foremost hard money is equity driven. I can’t think of one hard money lender that will lend over 80% loan to value (if you happen to know of one please leave a comment for our readers), in fact most cap out at 70%, some 75%. So the first thing you need to do, is take a hard look at how much you owe in relation to how much your home is worth. Add the necessary amount of cash you need to the current loan balance (and any penalties you may be facing), and closing costs for hte new loan, then divide this number into the value of your home and you will have an idea of what your loan to value is.

 Keep in mind many hard money lenders do not require a full appraisal to be completed. Instead their particular investors will research your home and come up with a value that they feel comfortable loaning against; a rough fact to live with, but it’s their gold so they make the rules.

 As for income and employment history, typically this is not not as important to the investor as you would think. There are many hard money lenders that do not require debt to income ratios to “make sense” in the conventional standard – that is under 50%. Usually they simply require that you document your employment history, and demonstrate you income in the form of W2s or 1099s, but do not consider the final DTI ratio.

In addition, your credit scores are not weighted as heavily as some would think. You can borrow money with a sub-500 credit score from a hard money lender. Ultimately, your credit score, and final loan approval are not dependent on one another. There are however other stipulations that they may have, for instance paying off all existing revolving debt, and having enough loan proceeds left to make payments on your home loans (Principle Interest Taxes and Insurance = PITI) for the next 6 months. Please keep in mind that it is an example, but something to prepare yourself for, especially if you are running numbers like I suggest.

To get started in a hard money loan is very similar to your typical home loan. Most likely you will have to complete a 1003 or Universal Residential Loan Application. Once this application has been completed, it is forwarded over to the investor who will conduct their investigation on the property – typically a two to three day process. Assuming they agree to proceed with the loan they will grant approval conditions pending. Fulfill the conditions and you have your loan. Based on this breakdown, the immediate advantage of hard money is all the red tape you are able to cut through; point in fact, you can receive proceeds from a hard money loan in much less time then your typical refinance.

As for the cost, this is dependent on the lender and investor that is chosen. Typically a lender is going to charge anywhere from 2 to 7 points, depending on the loan. Yes, this is a steep figure when comparing it to other conventional financing methods, but is often times justified based on how quickly they can expedite the process, and the ability to loan money when other people won’t.

For more information please feel free to comment or email peter@approved-online.com. Hope you find this helpful.