If you’re new to “hard money” loans — also known as “private money financing”, this article should help clarify what privately funded equity-based lending is about. Hard money financing has changed a bit in 2013, with many lenders moving toward more conventional underwriting guidelines, rates, and fees found in the old days of “sub-prime” loans, albeit with specific provisions for owner-primary properties under the Dodd-Frank Act. Nowadays, hard money loans do not need to be unreasonably expensive IF the right combination of factors exist.
A hard money “Equity based lending” — what does that mean? Who are hard money loans for?
Hard money loans are intended primarily for borrowers with:
- * more cash down payment / equity in the property than banks require
- * shorter-term financing needs (private money is not intended as a substitute for long-term bank financing)
- * a need for faster loan approval and fundings than traditional bank financing
- * no credit, limited credit, or a recent history of credit problems including late payments, bankruptcy, foreclosure, short sale, deed-in-lieu, liens, judgments, etc
- * non-U.S. citizenship (Foreign National)
- * in need of financing during a probate proceeding
- * lack of employment continuity / duration / career changes, employment gaps that banks do not allow
- * difficult-to-document qualifying income, complex incomes, unseasoned bonus / commission income, intermittent income from retirement and/or dividend distributions, limited partnership distributions, inheritance, contracts, accounts receivable, and other forms of income that fail to meet bank guidelines.
- * more than 4-10 financed properties owned concurrently
- * a need for construction, construction-completion, or renovation funds for investment property (banks don’t offer construction loans for investment / spec construction these days)
Hard money loans are NOT for:
- * purchase or refinance transactions with little or no equity (see below)
- * unsecured, personal, equipment, accounts receivable, or business-only loans (the only acceptable collateral is real estate)
- * someone seeking to borrow less than $20,000
If you are purchasing property, you’ll need a 25% – 50% down payment, plus points, lender fees, and third-party costs (escrow, title insurance, appraisal, etc). The amount of the down payment, interest rate, points and lender fees will vary depending on the lender and any number of factors like location, property type, occupancy, prior credit history, and others.
There are no “low-down” payment hard money loans. Hard money loans are predicated on a large margin of protective equity in the property at closing. In some purchase financings, seller-subordinated secondary financing is allowed with approval from the 1st-lien lender.
If you’re refinancing an existing loan, you’ll need between 30% and 50% equity in the property after the new loan is made — again, depending on the lender and factors like location, property type, occupancy, prior credit history, and others.
If you’re adding a hard money 2nd mortgage, you’ll need at least 40% equity in the property at closing, the interest rate will be higher, and you’ll find that most hard money lenders require a specific ratio of 1st – to – 2nd loan amounts to be viable. In other words, hard money 2nd mortgages allow a lower-rate 1st loan to remain in place, but due the the inherently riskier nature of junior liens the terms are less favorable than if the private loan were a 1st lien on the property.
Hard money rates vary from 7.50% – 12.00%, depending on a wide variety of factors, low loan-to-value being the primary determining factor. Someone borrowing only 20% of the value of a property will pay less for his loan than someone seeking to borrow 70% of the value of the property.
Payments for 1st-position loans on covered, consumer finance transactions are required to be amortized (principal and interest) installments under Federal law. This includes both purchase and refinance transactions.
Payments on non-covered loans (legitimate business purpose loans, legal bridge loans, and construction/renovation-only loans) as well as legal bridge loans and open-end lines of credit (temporarily), and loans secured by investment property may be interest-only installments.
The minimum balloon term allowed for a covered consumer finance loan on a consumer primary/second home must be a minimum 5 years, though most consumer hard money loans today have 7-year balloon terms with 30-year repayment (amortization) schedules.
Due terms for non-covered privately funded loans can be anywhere from 6 months to 10 years — it depends on the lender, transaction, property and other factors.
Points & Fees
Hard money loans involve fees to the lender and broker arranging the loan. The points charged for private money vary widely, but there is no such thing as a “no points” hard money loan. Other fees payable to the escrow, title insurer, recorder, and other third parties are additional and vary by vendor.
Ability To Repay
Borrowers are required under Federal law to verify sufficient income to repay a covered consumer finance loan secured by a borrower’s primary or second home. Only a non-covered loan transaction or loan secured by investment property may be qualified using “stated income”. There are hard money lenders still offering stated income 2nd mortgages, but provisions of the Dodd-Frank Act require proof of ability to repay open-end lines of credit beginning in January, 2014.
A hard money loan may have up to a 2-year early payoff penalty, or none at all. This again depends on the lender, transaction, property location, occupancy and other factors.
There are still private lenders making loans today that do not care about credit scores or prior credit history when making a loan. However, today’s new-generation hard money lenders offer pricing discounts for borrowers with better credit scores and elapsed time from prior major derogatory credit events like a bankruptcy, foreclosure, short sale, deed-in-lieu. etc. Unpaid taxes, tax liens, judgments, and delinquent court-ordered support payments must be paid for a new loan to close — either with proceeds from the new loan or prepaid in cash before funding, since these can trump the lien position on title held by the mortgage lender.
There are plenty of benefits to hard money loans — see my hard money loans page for more information. The above information is intended to expand on the positives about hard money lending by shedding some light on private financing in greater detail.
Call me today — (800) 644-8829. Hard money loans for California property only.