How do Hard Money Loans work?

[Annwar Matani]

Hi everyone

Can someone explain to me from start to finish how does a HML work? I always get scared when someone suggests HMLs... I literally think of loan sharks or getting your house or assets taken away from you when I hear it LOL.

What does points mean? How much are closing costs? And I understand (I think) your making interest only payments until you pay back the loan? What if I finish the project in 3 months do I owe any more interest on it?

Debating to use a HML for a flip or a BRRR. I'm trying to pinpoint my financial strategy in attaining these projects and HMLs are always suggested to me.

My goal this year is to buy my first investment. I want to operate from a place of logic, not fear. This forum so far has helped me very much in learning.

Thanks in advance

[Jaron Walling]

@Annwar Matani I'm glad you recognized the forums being a wealth of knowledge. The answers to most of your questions can be found just by searching in BP or online. 

If you want to operate from a place of logic you need to understand REI requires money. I started with $25k and I bought the cheapest distressed 2/1 SFH I could afford. HML, private money, and OPM it doesn't matter. You have to come to the table (a future deal) with funds to get the ball rolling. Very few investors (young or old) started out no $$$.

HML is a bridge from one side a river to the other. The river could be a BRRRR or flip. The longer you hang out on the bridge the more it costs you. Find a cheaper bridge! If this is your first investment property I'd shy away from HML and look else where. Save $$$, get creative on a rehab to cut the budget, look for cheaper RE, or leverage PM. Cheers.

[Carini Rochester]

A point is one percent (1%, 0.01) of the amount you are borrowing. One point on a $50,000 loan is $500.

[AJ Exner]

Quote from @Annwar Matani:

Hi everyone

Can someone explain to me from start to finish how does a HML work? I always get scared when someone suggests HMLs... I literally think of loan sharks or getting your house or assets taken away from you when I hear it LOL.

What does points mean? How much are closing costs? And I understand (I think) your making interest only payments until you pay back the loan? What if I finish the project in 3 months do I owe any more interest on it?

Debating to use a HML for a flip or a BRRR. I'm trying to pinpoint my financial strategy in attaining these projects and HMLs are always suggested to me.

My goal this year is to buy my first investment. I want to operate from a place of logic, not fear. This forum so far has helped me very much in learning.

Thanks in advance

Annwar,

Most credible HM Lenders are far from predatory, because if they do, they don't do it for long. 

Its a way to scale up without battering your own personal ability to buy personal real estate. They tend to be more lenient than traditional lenders (banks, etc.) and focus on the details of the deal more then anything. Many lenders will just focus on your ability to pay them back in the time and allow you to 'lather, rinse, repeat' as much as possible, without the same type of underwriting procedures. 

For example, instead of tax returns and W2s they will check bank statements and the After Repair Value (ARV) to underwrite the loan. This allows many groups (I know the crew at Easy Street can do this) even close a loan in a week or less.

They'll stay off of your personal credit, while not impacting your personal debt to income which is valuable as you start to scale. Then, they will fund a portion of the purchase price (80%-100%) and usually 100% of the rehab on a reimbursement basis. 

HERE is a link that might help you find a lender. There are some bad ones out there, for sure, but there a lot of good ones that, if leveraged property, will help you scale and grow your portfolio sooner than you think.

Good luck!

[Erik Estrada]

Quote from @Annwar Matani:

Hi everyone

Can someone explain to me from start to finish how does a HML work? I always get scared when someone suggests HMLs... I literally think of loan sharks or getting your house or assets taken away from you when I hear it LOL.

What does points mean? How much are closing costs? And I understand (I think) your making interest only payments until you pay back the loan? What if I finish the project in 3 months do I owe any more interest on it?

Debating to use a HML for a flip or a BRRR. I'm trying to pinpoint my financial strategy in attaining these projects and HMLs are always suggested to me.

My goal this year is to buy my first investment. I want to operate from a place of logic, not fear. This forum so far has helped me very much in learning.

Thanks in advance

 Hard Money lenders are not in the business of taking properties. They are in the business of lending. 

If it was shark money, you will see lenders charging ridiculous fees, and providing unreasonable terms. Most lenders in this market are less likely to issue a loan that you will default on. They are going to finance you based on your loan to value, experience, and liquidity. 

If this is your first time working with a hard money lender, I would make sure you do your due diligence on the property details before presenting it. Have multiple exit strategies, do not be over leveraged, and make sure you are factoring market changes. Be as conservative as possible. 

For a first timer, you can expect a hard money lender to provide 70-75% of the purchase price, and 100% of the renovation budget, depending on the after repair value. They will require you to work with a GC. 

The loan is short term, for 12-24 months and you will be expected to sell, refinance, or pay the balance in full at the end of the term. You pay interest only for 12-24 months. 

[Arthur Schwartz]

HML is the same as getting a mortgage from a regular lender such as a bank or credit union, but the HML does not require as much documentation and they provide money really fast say, within a few days. A conventional mortgage can take weeks to get. In exchange for less documentation, the HML charges a higher interest rate

[Ryan Davies]

Most work like this: 

• Rates: 9% to 13% (Most Deals are 11-12%)
• Terms: up to 36 Months (Most Deals are 6-12 months)
• Fees: 2-4 points(%) of loan amount paid at closing (Most Deals are 3 points(%))
• Minimum Loan Amount: $50,000 (For loans less than $250,000 $2,500 minimum fee)
• Max Loan: 65%-70% of After Repair Value(ARV)
• 100% Rehab Financing Available (Require 20% of purchase price down payment or cross-collateral)
• Closing Timeframe: 48 Hours - 3 Weeks (Most Deals are 2 Weeks)
• NO PRIMARY RESIDENCES, NON-OWNER OCCUPIED ONLY, BUSINESS AND COMMERCIAL USE ONLY.

[Mike Klarman]

So "Hard Money" refers to a secondary lender market for non owner occupied residences.  These are loans that a conventional bank would not do for the most part and they are most times biz to biz loans.  That's why Hard Money and Private Money are so hard to tell apart and to know when to use them because if the money in unconventional then it's private money right?  A wealthy individual, a group of wealthy individuals, or a hedge fund is lending money, private money to strangers for the purposes of buying distressed, fixing the asset up, and either exiting through sale or refi.

Just keep in mind t he relationship between maturity and interest rate.  The shorter the maturity, the higher the interest rate, the longer the maturity the smaller the rate drops.  So on bridge loans with rehab you'll see a rate of 11% - 12% because it is a one year loan.

Here's how they work soup to nuts:

You have an executed purchase contract, your entity docs, your id.  If you are new or you are not working with a broker, not sure how you'd start the loan or what you'd need.  But for the purposes of this explanation let's say you're my client and this is your first deal with me.  You send me your contract, entity docs, id, I'd need your social, your phone number as well.  With that I can start the loan file.  Now, I need from you a contact at a title company and a contact for insurance.  I will send them guidelines as to what is needed in the title commitment and in the insurance policy.

Once all that prelim stuff is out of the way, the most important thing to do in a bridge loan is tackle the rehab budget because you can not order the appraisal until the rehab budget is complete.  And the rehab budget is very important.  It is your one and only chance to influence the appraiser.  He/She will walk the property with your rehab budget in hand so the more descriptive you can be, the better chance you have at receiving a value in your favor.

Once we have the rehab template complete we order the appraisal.  Appraisal turn around time with no rush is 7 - 10 days.  In that time, you'll fill out a few forms.  Maybe an ACH form for auto payment information.  There's usually a credit auth form.  

They'll run your credit and b.g, (I always get this upfront because it's best to know this right away so I always ask people what their credit is and if they have anything that will come up on b.g. report.

While waiting for the Appraisal we'll get the title docs back, once the appraisal comes back and the as-is and ARV values are solidified the terms of the loan are also set. We now get final insurance and you need to bind it.

Once the loan file is complete off to Underwriting you go.  In Underwriting they will look at the borrower and the asset.  Check all docs carefully.  Make sure everything lines up and makes sense.  This can take 2 days to 7 days depending on if there are any problems or things missing or if it is a slam dunk easy loan.

Once out of UW, you will go to approval stage.  This is where the executive committee of the lender takes the final vote to fund or not fund.  If everything checks out, it is 99% vote to fund.

You get approval and now the closer for the lender will work with title to balance the HUD and get the settlement sheet together. Once that is ok'd by all parties then loan docs are generated and sent to title.

Title sends the title docs to you or you can go to their office and sign.  If they send to you then you take docs to local bank and sign with a notary.  You first scan docs and send them by email to title.  Once they sign off and tell you they look good then you will have like an over night envelope to put them in and mail to title.

Once Lender looks over signed docs (the digital ones), they provide final green light to title to fund the loan.

And I'm out of breath... 

[Annwar Matani]

@Mike Klarman This was the best thorough explantation from A to Z thanks! 

[Robert B.]

Someone posted this video link in another thread...pretty good at explaining...Youtube Hard Money Lender

[Doug Smith]

Just a note, people think "Hard Money", "Private Money", and "Bridge Loans" are the same. They are not. 

Private Money is simply money from a non-institutional source...such as someone lending out of their personal IRA or from their savings.

Hard Money is a loan that is 100% based on the value of the collateral. Not much if any attention is paid to the guarantors, credit, income, etc. 

Bridge Loans are short-term (usually around 12 months) at a higher rate and fee to get a borrower from one point to another. For instance, a flip loan is usually a bridge loan. 

I'll let the rest of the peanut gallery take it from here. 

[Bob Stevens]

Quote from @Annwar Matani:

Hi everyone

Can someone explain to me from start to finish how does a HML work? I always get scared when someone suggests HMLs... I literally think of loan sharks or getting your house or assets taken away from you when I hear it LOL.

What does points mean? How much are closing costs? And I understand (I think) your making interest only payments until you pay back the loan? What if I finish the project in 3 months do I owe any more interest on it?

Debating to use a HML for a flip or a BRRR. I'm trying to pinpoint my financial strategy in attaining these projects and HMLs are always suggested to me.

My goal this year is to buy my first investment. I want to operate from a place of logic, not fear. This forum so far has helped me very much in learning.

Thanks in advance

 How,?  you borrow a % typically 60%, pay back interest only with a ballon, 13, 14% plus 2- 4 points, 

Good luck 

[Paul Alvarez]

Hello, I'm a FHA / Conventional & Private Money mortgage underwriter since 2012, If your a first time real estate investor and never applied for Hard Money or Private Money lending for funding, I would suggest to stay with traditional lending (conventional) until you get familiar with real estate finacing. Each state has specific regulations in lending for Private/Hard Money (*Texas*). Mostly Attorney states are the most difficults states to lend on. My suggestion to consult your accountant or tax prepared referring to points which also know as loan origination fee and interest rate how this will affect and will this be an advantage for your business? The only advatange of Private/Hard Money Funding is less paper to non paper work or a Non Tradition Lending programs available like DSCR (debt service coverage ratio) or Bank Statement. If your tax return or W2 (wage earnings) support your income and you qulaify with the traditional (conventioal) lending you better off doing that route. My suggestion to any one that are first time real estate investor in fix & flip, or planning to hold property for rentals, is to learn or read, understand about real estate financing first, build your assets and network or partner withsome has completed some projects in fix & flip and has some rental properties with positive cash flow within your immediate area before dving in to any project by youyrself. Just my opinion, I hope this helps.

[Robert Bell]

Asset based, aka Hard Money Lenders, make the loans the banks cannot make.

Very short terms. Higher rates.

But what do you get in return.:

Quick access to capital. If you are competing with cash buyers and a great deal comes your way, it may be worth it to borrower at these higher rates.

[Adam Schneider]

@Annwar Matani

A few comments that I don't think have been mentioned among all of the replies that are worth considering:

1. One huge benefit of a private/HML loan is the strength of making an offer when competing with cash buyers. So, you need to know what the terms and conditions and time frames are for the private/HML lender when preparing to submit an offer. Things move very quickly.

2. If using a private/HML loan for the first part of the BRRRR, you'll want to understand the terms and conditions and timing so that there's not an issue when you refi. For example, if the refi lender requires 6 months of seasoning so that the refi is based on LTV rather than LTC, then your HML will likely be 7 months...

[Robert Bell]

Adam, great points!

Many times having great credit is not enough to secure a deal with a traditional lender quickly enough when one is competing with cash buyers. Private and HML can move very quickly and loan on distressed properties.

Also, for BRRRR investors, you should know for certain all the qualifications for your refinance.

I have seen many borrowers with short term, private loans have to carry the loan months longer than they were expecting to because they did not know all the ins and outs of the DSCR refi process.