Four Reasons to Use a Hard Money Lender for your Real Estate Investment
Hard money lenders play an important role in the real estate finance industry. Hard money lenders, also known as private lenders, offer an alternative source of financing to borrowers when they do not qualify through conventional lenders such as big banks or credit unions.
Unlike conventional lenders, hard money lenders are more focused on the equity the borrower has in the property versus their financial condition. The more equity in the property, the less risk a hard money lender would have should the borrower default. The equity the borrower has in a property is the lender’s security and assures that the loan can be repaid through a foreclosure sale.
Equity is contributed by the borrower through either a down payment at close or from long term appreciation. Most hard money lenders limit their loan to 65% – 70% of value based upon the asset type. So, the question then becomes why would a Borrower use a hard money lender if they had substantial equity in an investment property?
#1 – The Need for Speed
Many borrowers rely on hard money lenders because they don’t have the time to wait for a conventional bank to complete their underwriting. The real estate market is extremely competitive, and sellers are more likely to accept offers with shorter closing timeframes. Less hassle, less headache. Hard money lenders are able to accommodate such situations and have the ability to close quickly because the application and underwriting process is much less grueling than that of a conventional bank. The need for a quick turnaround is enough of a reason for many real estate investors to seek financing from a hard money lender.
#2 – Flexibility
Hard money lenders typically provide more flexible terms and can offer more creative lending solutions. Because conventional lenders do a high volume of loans or target a specific loan type/structure they have much less flexibility when it comes to providing lending solutions for out-of-the-box scenarios.
Two popular hard money loan products are the Fix & Flip Loan and the Bridge loan.
Fix & Flip loans afford real estate investors the opportunity to gentrify communities while keeping their out of pocket contributions throughout the duration of a project, at a minimum.
Another popular hard money product amongst real estate investors are bridge loans. Bridge loans are typically 6 to 18 months in term and require the borrower to fund 20% to 30% of the purchase price. The hard money lender will fund the difference with a short-term bridge loan. Cash out refinances also fall under the scope of a bridge loan. Many times, owners of real estate investment properties wish to pull cash out of the property with intentions to cosmetically update the property or complete necessary repairs to maintain the property. Because bridge loans are shorter in term, the exit strategy is usually to sale the income property or refinance the income property with a conventional longer term loan.
When obtaining a bridge loan, a Borrower will find it is not uncommon for hard money lenders to require interest payment guaranty periods. Hard money lenders need to earn interest on their loan. For this reason, many hard money lenders will include a 3 month or 6 month interest payment guaranty. The interest payment guaranty stipulates the minimum number of interest payments the borrower is required to make prior to refinancing or paying off the loan. Should the borrower choose to refinance or pay off the loan off before the interest payment guaranty period, the borrower will be required to pay the difference of the minimum interest unearned through the payoff. Still, many real estate investors recognize this stipulation as less of a drawback than other various prerequisites imposed by more conventional lenders.
#3 – Poor Credit or No Credit
Another common reason that a Borrower uses a hard money lender is due to their lack of credit history or less than favorable credit record. Many real estate investors are still suffering from the housing downturn. This is in part because recovering from a foreclosure or short sale can take many years. Such a blemish significantly reduces one’s ability to obtain conventional financing. Other real estate investors may have credit scores that are negatively impacted by personal or property tax liens, outstanding medical bills, and other various business-related expenses.
#4 – Lack of Income
Many real estate investors or brokers do not bring home a steady paycheck, rather their income is earned on a “deal by deal” basis. Such inconsistency presents a challenge to big bank underwriters, making it difficult for them to underwrite and understand their entire financial situation. Since hard money lenders are more focused on the equity of the property, as opposed to the Borrower’s entire financial condition, a hard money loan may offer a better solution.
For example, an owner of a duplex is seeking financing and would like to do a cash out refinance in an attempt to purchase another property. However, the borrower has little to no reportable consistent income. A hard money lender would be less focused on the Borrower’s income and focus more on the equity and income generated by the property. If the income covered the monthly payments of the loan, this could be a viable loan for both the borrower and the hard money lender.
Hard money lenders play a critical role in financing real estate investment purchases and refinances. Yes, the cost of financing can be higher than that of conventional lenders, but hard money lenders offer certain advantages that conventional lenders can’t fulfill.
About TaliMar Financial
TaliMar Financial is a California hard money lender located in San Diego, CA that specializes in funding residential and commercial Fix & Flip, Construction, and Bridge Loans. As a direct lender, we offer high LTV ratios at below market rates and can structure a loan around your specific need. Contact TaliMar Financial today at (858) 613-0111 or visit us at talimarfinancial.com.