A Guide To Hard Money Lending
When it comes to home financing, not everyone meets the approval requirements associated with conventional lending contracts. Hard money loans are a unique funding option commonly considered by real estate investors, both new and seasoned.
In this Rules of Thumb blog post from MoneyThumb, we’ll look at hard money FAQs commonly asked of lending professionals. These will hopefully dispel some misinformation you may have heard.
What Documentation Do I Need To Provide For A Hard Money Loan?
Answer: Hard money loan approval relies heavily on the value of the property being financed. In most cases, they require less paperwork from the borrower than conventional loans.
However, there are some documents that you should be prepared to supply, depending on the unique terms of your hard money contract. They include:
- Documentation of the potential value of the property you want to purchase
- A clear financial plan for your investment and projections for growth
- Proof of your ability to make a down payment covering from 30-40% of the home value
- Minimal documentation regarding your personal finances such as pay stubs, bank statements or tax paperwork
How Long Does It Take To Get Approved For A Hard Money Loan?
Answer: With the proper documentation on hand, we can provide pre-approval for hard money loans in as little as a day. Each case is unique, of course, but these funding solutions are well-known for their quick turnaround to help clients move on exceptional opportunities, fast.
What Type Of Property Can Be Purchased With A Hard Money Loan?
Answer: Borrowers use their hard money financing to purchase single- and multi-family residential homes, commercial property, homes in need of renovations, undeveloped land, and even industrial properties.
Do Hard Money Loans Always Have Very High-Interest.
Answer: It’s no secret that hard money, private money, and other alternatives to traditional financing typically have higher interest rates than conventional loans. That’s why it’s essential to work with a mortgage professional who has connections with several top lenders.
When lenders compete for your business, this drives lower interest rates. Even still, you should know that hard money loans should be used almost exclusively for short-term investments. This is especially true when they have adjustable rates that can become very volatile in a short time.
How Much Can I Borrow Against The Value Of An Investment Property?
Answer: Hard money loans have no upward limit because they are fully funded by private investors. Even for homes in the millions, hard money lenders typically will not provide more than 75% of the loan-to-value (LTV) ratio on a property. That is, the loan amount divided by the value of the property.
This means you’ll need to come up with a down payment of 25% or more. If you’re planning to make renovations to a property, you may be able to receive funding based on the LTV for the estimated value of the property post-repair, called the after-repair value (ARV).