Questions About Hard Money Lenders and Repayment

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Questions About Hard Money Lenders and Repayment

Sonya B.
Houston, TX · Member since 2016 · 23 posts · 10 votes

Hi BP! I have a couple of SUPER NEWBIE questions about repaying a Hard Money Lender (I've never even had a regular mortgage for a personal residence). 

1. My assumption is that once you get the hard money loan and you have the property, in the interim while rehabbing and before selling the property, I would need to be making monthly payments to the Hard Money Lender until I was able to sell the property to an end buyer.

2. Don't people usually use Hard Money Lenders because they DO NOT have their own cash (or even private money) to fund the deal? So, for those who use Hard Money Lenders because they don't have their own money, where do they get the money from to make monthly payments back to the Hard Money Lender before they are able to sell the property?

Is this correct? If not, could someone please explain how the repayment would work? Thanks in advance.

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Jeff Rabinowitz
Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes
9y

Every lender has their own criteria and their terms will vary depending on the borrower's experience, capital contribution, credit, strength of the deal (how much equity is there), and other factors. Not all private loans require monthly payments. Some lenders may be comfortable funding the deal for a specific term that will allow the property to be rehabbed and sold before payments are required. It is possible to get a private loan without contributing any cash but those terms are not likely unless the borrower has a well established track record and the current deal is being purchased well below market value. The less experience you have, the more cash you will need to show or the stronger your deal will have to be to attract funding.

If you are applying for a loan that requires monthly payments you must budget for a loan large enough to allow you to complete the rehab and make the required payments. If you do not, the lender may foreclose on their loan and take possession of their (it was purchased with the lender's funds) property back.

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  • Michael Miceli
    Real Estate Agent · Oswego, NY · Member since 2017 · 11 posts · 8 votes
    9y

    I am still fairly new so I am sure there is someone with a lot more experience.  Yes, you would be responsible for a monthly payment so having some method of paying it is needed.  You can not go in blind and need to have a plan on what funds you do need if the rehab takes longer than expected or the house doesn't move.  Hard Money loans can be a good finance option if used correctly, but not very often will you find a deal where you can use a hard money loan to make a purchase, rehab, and flip with no out of pocket expense.  

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  • George Taylor
    Wholesaler · Myrtle Beach, SC · Member since 2017 · 276 posts · 80 votes
    9y

    Correct. The advantages of a HML is quick funding, not much in the way of required documents and no prepayment penalties. Any HML will require you to bring at least 10% down and the harder the loan the more down you will be required to bring. A lot of people use private money to obtain the down payment for HML's however.... A lot of HML's won't accept them and lend to you because they will have to take 2nd position and you, as the borrower, wouldn't have any skin in the game.

    To make the payments you would need to have reserves in the bank and will more than likely have to show a POF to verify that. Something to keep in mind also is if you get a purchase and rehab loan you will be more than likely be required to front certain projects and be reimbursed on a draw process. Hope this helps some..

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  • Jeff Rabinowitz
    Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes
    9y

    Every lender has their own criteria and their terms will vary depending on the borrower's experience, capital contribution, credit, strength of the deal (how much equity is there), and other factors. Not all private loans require monthly payments. Some lenders may be comfortable funding the deal for a specific term that will allow the property to be rehabbed and sold before payments are required. It is possible to get a private loan without contributing any cash but those terms are not likely unless the borrower has a well established track record and the current deal is being purchased well below market value. The less experience you have, the more cash you will need to show or the stronger your deal will have to be to attract funding.

    If you are applying for a loan that requires monthly payments you must budget for a loan large enough to allow you to complete the rehab and make the required payments. If you do not, the lender may foreclose on their loan and take possession of their (it was purchased with the lender's funds) property back.

    1Reply
  • Sonya B.
    OP
    Houston, TX · Member since 2016 · 23 posts · 10 votes
    9y
    Originally posted by @Michael Miceli:

    I am still fairly new so I am sure there is someone with a lot more experience.  Yes, you would be responsible for a monthly payment so having some method of paying it is needed.  You can not go in blind and need to have a plan on what funds you do need if the rehab takes longer than expected or the house doesn't move.  Hard Money loans can be a good finance option if used correctly, but not very often will you find a deal where you can use a hard money loan to make a purchase, rehab, and flip with no out of pocket expense.  

     Thank you for your response, this answers my questions. Just wanted to verify there would be monthly repayments.

    0Reply
  • Sonya B.
    OP
    Houston, TX · Member since 2016 · 23 posts · 10 votes
    9y
    Originally posted by @George Taylor:

    Correct. The advantages of a HML is quick funding, not much in the way of required documents and no prepayment penalties. Any HML will require you to bring at least 10% down and the harder the loan the more down you will be required to bring. A lot of people use private money to obtain the down payment for HML's however.... A lot of HML's won't accept them and lend to you because they will have to take 2nd position and you, as the borrower, wouldn't have any skin in the game.

    To make the payments you would need to have reserves in the bank and will more than likely have to show a POF to verify that. Something to keep in mind also is if you get a purchase and rehab loan you will be more than likely be required to front certain projects and be reimbursed on a draw process. Hope this helps some..

     Thank you for the information. I will definitely keep this in mind for when I'm budgeting and looking at deals.

    0Reply
  • Sonya B.
    OP
    Houston, TX · Member since 2016 · 23 posts · 10 votes
    9y
    Originally posted by @Jeff Rabinowitz:

    Every lender has their own criteria and their terms will vary depending on the borrower's experience, capital contribution, credit, strength of the deal (how much equity is there), and other factors. Not all private loans require monthly payments. Some lenders may be comfortable funding the deal for a specific term that will allow the property to be rehabbed and sold before payments are required. It is possible to get a private loan without contributing any cash but those terms are not likely unless the borrower has a well established track record and the current deal is being purchased well below market value. The less experience you have, the more cash you will need to show or the stronger your deal will have to be to attract funding.

    If you are applying for a loan that requires monthly payments you must budget for a loan large enough to allow you to complete the rehab and make the required payments. If you do not, the lender may foreclose on their loan and take possession of their (it was purchased with the lender's funds) property back.

     Thank you for the information. This is very helpful.

    1Reply
  • Ariel Salvaro
    Lender · Charlottesville, VA · Member since 2017 · 37 posts · 11 votes
    9y

    Sonya, most HMLs require monthly payments, but not all do - e.g. we do not require monthly payments for the initial term of the loan, and we do loan in Texas too. So I would suggest checking out BiggerPockets' HML database for Texas here:

    https://www.biggerpockets.com/hardmoneylenders/texas

    You can reach out directly to all HMLs, and see your options first-hand! 

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