Maximum duration of a Hard Money loan?

Question

Hi all,

I am thinking about starting a Hard Money Lending company and was just wondering if writing a 30-year hard money loan is even an option? Does anyone know if there is a maximum duration on these types of loans, or does it vary by state? Thanks in advance!

Jeremy Kitchen · Answer

Hi, Mark!

I could be wrong, but most Hard Money Lenders are for very short term only.  You really want to find good deals to finance if you're going to do it, with around 60-65% loan to value.

I don't think it would be beneficial for you or your buyer to finance with you long term.  Hard Money Loans are typically around 9-12%. With conventional financing around 6% right now, no one would want to pay long term for hard money fees.  Plus, if you went down to what conventional financing offers, your money won't even beat inflation.  With hard money, you'll be taking 1st lien on projects.  If the buyer defaults or it isn't a good deal, it's now your problem to fix.  Which is more risk.  Also, per the dodd frank act, a person cannot offer a mortgage while someone lives in the property unless said lender is licensed.  Hard money is for non owner occupied properties.

Hopefully that helps.  Let me know if you have any questions

Alex Breshears · Answer

Hi Mark!

As a private lender, I will tell you when you are lending out your own capital, as long as you are within the limits of the usury laws of the state you are lending in, you can do whatever you want.  You must lend on non-owner occupied property only, as owner occupied property is under Federal regulations and licensing will apply.

Now as far as scaling a full fledged business. I want you to take a step back and ask why do you want to do this as a business? Personally, I do private lending and lend my own capital, and that is plenty of passive income for me and my time. I didn't want to run a full fledged office with people, and payroll, and phone lines, and internet access and subscriptions to technology platforms. That just isn't me. I like my business in a backpack. If I have internet connection, I can log in and look at borrower documents, see if payments have been made, wire funds to the closing company, etc.  There is a trade off where volume becomes more of a ball and chain than just "more money".  So before you think about scaling to a large business, I would say really evaluate what you want your lifestyle to be, and then head in the direction that gets you there. Many people end up in real estate investing because they say they want financial freedom, when in reality they want time freedom or geographical freedom (go where I want, when I want).  Building a business is a wonderful, trying, and amazing experience, but if you are one of the people who deep down wants those freedoms, building a business isn't going to get you there. Bigger is not always better. So think about the cash flow you want each month, the time commitments you have to family, activities, and anything else, and then decide exactly how far down the road you want to go.  Don't aspire for financial freedom by working yourself into another job if that isn't truly what you want.

Mike Klarman · Answer

Hard Money Lenders have 30 FRM and ARM products, some do.  We have a 30 year Fixed Rate Mortgage product called DSCR = Debt Service Coverage Ratio.  It's been in Hard Money industry now about 4 years.  It's based on the ratio of loan payment to your rent.  By how much does your rent collection cover your loan payment essentially.  Most banks only require 1.1 : 1.  Which isn't much.  I see deals all the time with a DSCR of 1.4.

Hard Money is a tool in the tool box of the real estate investor.  The Most popular products are the short term fix n flip loans, the DSCR Purchase and the DSCR cashout refi.  Are there Hard Money lenders out there with just sh!tty programs?  Yea, there are and if you try and do a deal with one and it goes south people feel like Hard Money is a scam or a pain.  Maybe that Lender was bad, but there are good fair HMLs out there.  We're one.  The loan is only go as smooth as your Loan Officer makes it.

Your Loan Officer should know what his underwriting team wants to see in the docs and how they expect to see it presented so if you turn something that ain't gonna fly your LO should catch it right there.  Cause the way it works is that there's a line to go into UW and once they take you in and start their intensive exam of your docs if they find something that isn't right you get kicked out and given 24 hours to correct the error and if not - to the back of the line you go.  For a busy bank, that's how it works.  Your LO should be responsive and attentive to your loan so the process for the borrower is smooth.

Nick Belsky · Answer

@Mark Andrews

HML are typically short term loans between 6-36 months.  They are high cost and high rates with lower leverages.  Some will go up to 60 months but beyond that I've never heard of nor seen. It doesn't make sense to stay in a HML that long.

Private Money, on the other hand, is very competitive with conventional and is great for long term loans.

The states do not regulate loan terms in regards to the length of the loan.  The individual investors who are backing the programs will.

Cheers!

Issac San Miguel · Answer

To answer your question, it is your money to do with what you want.

I am not a lawyer but I do not think there are any laws, state or otherwise, that would prevent you from writing 30 yr loans.

I would consult with a lawyer before you write any deals.

Others here have mentioned the cost to starting a hard money shop is between $200k-$300k.

Are you looking to be an actual shop, or just do a few private money loans?

Maximum duration of a Hard Money loan?

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