How does a hard money loan work?

There are tons of loans available for real estate investors. A type of loan commonly used by investors is the hard money loan. These loans allow investors to purchase and repair investment properties. If used correctly, it can definitely put money in your pocket right away. But keep in mind that there are some pitfalls that you will need to avoid in order to be successful. Here’s how Hard Money works and what you should be aware of.

1. Scope of Work – For these specific types of loans, lenders will require the investor to provide a scope of worksheet. Every repair he plans to do should be noted on this sheet. The scope of work worksheet is what the Hard Money lender will use as a guide to pay for the project. If repairs are made that are not on the worksheet, you may have trouble getting your money back from the Hard Money lender. The lender will want to see everything in writing to make sure everyone is on the same page. Lenders will normally allow investors to change the scope of work in the middle of the project if possible and necessary.

2.Requirements: Most hard money lenders now want a 20% investor discount on all projects. The lender will also want to see reserve money in some bank. The investor’s monthly income will play an important role with the lender in approving the loan. Credit score is a factor, but they don’t require a stellar score to approve a loan. The last hard money lender I used didn’t even get my FICA score, they just wanted to see a copy of my credit report, which I was able to request for free. There will be loan value requirements, but each lender will have their own set of guidelines.

3. Overestimated Repairs: Repairs on an investment property are always just an estimate. When rehabbing a property, nothing goes as planned. Overestimating the repair that must be done to cover yourself if repairs are added later in the rehab. If you did a good job with the initial inspection and no further repairs were needed, you can either return the money or keep it. If you decide to keep it, don’t spend the additional funds. Keep the extra money as an extra reserve.

4. Process: The process of receiving money for repairs is called a lottery. After your contractor finishes a percentage of the job, he’ll call your hard money lender and tell him he’s ready for an inspection. The lender will send an inspector to verify that the work was done and completed within code guidelines. Once the inspector gives the lender the go-ahead, the lender will release funds equal to the amount established for the cost of the work. For example, if he listed carpet repair $1,500, paint $1,200, and new light fixtures $100; When the inspector marks all items: The lender will write you a check for $2,800. He can now understand why it is important to have all repairs and costs listed on the worksheet. If the repairs are not on the list, you will not get paid. Typically, the lender will give you 3-7 inspection dates, depending on the size of the project. Unless he can convince the contractor to start work without putting up any money, he will have to put up the money to start. Expect to receive payment from the hard money lender through your drawing checks.

5. Refinancing: This is the most important part of rehabbing a property through a hard money lender. Hard money loans are short-term loans with high interest rates. These interest-only loans will carry an interest rate of around 15%. That may seem high, but these types of lenders understand how important it is to make money and get out. We need these companies to rehab properties if we can’t finance our own projects. Hard money lenders realize the risk they are taking, so lenders ask “WIIFM” (What’s in it for me?). They compensated with a high interest rate for the risk they took. Hard money lenders hope you’ll either sell the property quickly for a profit, or refinance it into a long-term loan and rent it out to a tenant. Whatever your exit strategy, make sure you do it fast. Hard money loans typically mature in full 6-12 months after origination.

Hard money lenders have allowed many investors to make money in real estate. These types of lenders are more flexible compared to the traditional ones. They allow investors to make things happen when no other lender wants to take a chance on them. His guidelines are losers and allow an investor to spread his wings. These types of loans are expensive, but can allow for more deals to be made due to the amount of money they have access to.