Are Hard Money Loans always more expensive than Bank Loans?

Question

I am looking for a loan where I am putting 20% down on a multifamily property and wanted to know whether it makes sense to bother looking at the hard money lenders on biggerpockets or should I only consider banks?

Jack Tulloch · Answer

Hey James - I agree with Nick. Bank will be cheaper if you and the property can qualify, hard money will be needed if property needs rehab.

Nick Belsky · Answer

@James McGovern

In short, yes. But they serve a purpose, several actually. Hard Money are typically short term, higher interest rates, with interest only payment and no Prepayment penalties. They are intended to bridge a gap until the property can be stabilized and brought to a bank or other private lender for perm financing. They often encompass renovation funding, quick turn times, and looser underwriting guidelines. Some do not even look at your FICO and base the loan solely on the collateral.

Banks offer cheaper costs, lower rates, much much slower to close your loan, much stricter underwriting guidelines, often perm financing options, and are heavily based on FICO, assets, and collateral.

There are pros and cons with each, but it ultimately comes down to your scenario and what you are trying to accomplish. If you are an A paper borrower and have time to wait in escrow for things to close, a bank may be a great option for you. If you have a deal that needs to close in 3 weeks, want financing to renovate, and are planning to sell in 6 months or refi to perm financing to hold long term, then a Hard Money Lender may also be a great fit for you.

Cheers!

Erik Estrada · Answer

Hey James,

Hard Money is the most expensive, next to using some sort of business credit card with a high a APR.

It is best used when purchasing a property that needs to close fast, needs significant rehab work, and if you are looking to leverage other real estate to buy with no money down (cross collateral loan).

Traditional commercial or conventional (1-4 units only) are top tier financing. Be prepared to show 2 full years of work history, assets, and meet the DTI requirements.

There is an in-between known as DSCR financing (up to 10 units). The minimum downpayment is 20-25% depending on how many units. You qualify based on the rents covering the full mortgage payment.

Devin Peterson · Answer

Why would you need a hard money lender? Do you intend of financing renovation costs? With 20% it sounds like if you are buying turn key you would be able to go DSCR no problem.

Chris Seveney · Answer

@James McGovern

Private money is always more expensive unless it’s seller financed and you can get the seller to finance the deal

Someone may say they have a friend or family member who will give a preferred rate but any lender not a family member / friend who is going hard money will be more expensive

Are Hard Money Loans always more expensive than Bank Loans?

Are Hard Money Loans always more expensive than Bank Loans?

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