What is Hard Money Lending?

Question

Well I know the basics of hard money lending, my question is, how does the investor receive the financing, does the lender cut a check and give it straight to the investor, or do they give it to the seller of the property, does it go into escrow?

Mark Gorjestani · Answer

Run fast from that offer.  Its to good to be true and they will take your money.  The longer the term the higher the rate and points...in all lending.

MDG- Finance One

Lee V · Answer

Hey Jon and whoever else is experiences with hard money lending.

I talked to a HM lender today, and here is how he does his lending:

He only requires you to come in with 15%, which sounds really good.

The hard money loan is set up for 7 years term, 8-10% interests.

He said that all the cost, fee, points, etc, runs about 8% of the loan amount. (which i thought was very high).

The crazy thing is..... in the loan contract and during escrow, some type of trust fund is going to be set up so that whenever you do sell, or refi, or even pay off the loan..... the lender will recieve a 10% additional fee at the end of the term. (im new to hard money so I have never heard of this before).

For example, if i get a house under contract for 100k, I'll need to come in with 15k, 8k for the associated fees, and then I have the option to keep this loan for up to 7 years at 8-10% interest. When I sell the property, they get a 10% payment of the loan amount, so they get 8500.

Is this a bad deal??????

Tiara Murray · Answer

Thanks Jon, this made it much more clear. And you're right, I will definitely need a partner, the big challenge is finding one.

Jon Holdman · Answer

Tiara,  I recommed you buy a book for first time home buyers and give it a read.  That will give you the basic process.

Very briefly.  If the house is listed on the MLS, you would have an agent show you the house.  That could be the listing agent (the one on the sign), or your own buyer's agent.  That agent would write an offer, and present it to the buyer, via the listing agent if that was a different person.  Most likely, there would be a couple of rounds of negotiation and you would agree on the price.

The agent would then take care of working with a title company to get everything done.

Before you even get to the point of viewing the house, the agent will want to see a loan preapproval.  So, you will need to locate a hard money lender, and get approval from them.  They will look at your financials, credit, and track record.  The hard money lender (or any lender, for that matter), will give you a "preapproval letter" that says you're approved for a loan up to some amount, contingent on nothing personal changing before you close and the property appraises for an acceptable amount.

Clearly, you've never bought a house, so there's no track record.  That may be an issue for many hard money lenders.  You should look for a partner.  Someone who's done a rehab before and knows the process.  At the very least, find an agent you can work with and use them for the first transactions.

Assuming you get an approved loan and an accepted contract, the steps cuca lists kick in.  You give the lender (or broker) the specifics of the deal.  You or they get it appraised.  You get it inspected.  The agent (or you, if there's no agent), contacts a title company and "opens escrow".  The title company will do a title search.  They also prepare a preliminary HUD-1.  They will contact the lender and arrange for the lender to send in their funds.  The agent will provide the earnest money.  You'll be told if you need to kick in money or not.  If so, you'll need to send it in ahead of time or bring a certified check to closing.

Find a first time homebuyers book and give it a read.  It will at least give you an overview of the process.

Tiara Murray · Answer

Ok, now I am even more confused.

What are the steps in putting a property under contract?

What does "request some of the escrow documents" mean? Do I have to secure a title company myself?

What exactly is "fund an amount to escrow"?

Please excuse me for being inquisitive, but I am a newbie, and I am trying to absorb as much as possible.

Jon Holdman · Answer

In many ways, its just like a conventional loan.  You do the closing at a title company or lawyer's office.  The lender puts the loan amount into escrow at the title company.  The buyer might have to put in money or might get it back money back, depending on the deal.  The title company issues checks as specified on the HUD.  Typically, a big one ot the seller.  Points back to the lender.  Repair escrow checks to the buyer but given to the seller (at least that's the way I've done it.)  If there's cash to the buyer, they would issue that check, too.  Personally, I'd never give a check directly to the buyer.  Unnecessary and risky.  A title company will make sure all the right paper work is done in the right order and that money is sent to the proper people.

Tiara Murray · Answer

Ok please forgive me for being confused. So let me give this example and then you respond. I am driving in a target neighborhood, and I spot a house that I would like to buy, I take a walk through, and make an offer. I am financing through a hard money lender, so what happens after I have the house under contract, and have been approved for a loan?

Steve L. · Answer

Hard money lenders have different requirements.  Go to a local REI meeting and speak with other investors to get the names of some of the best local hard money lenders.

Some will loan a % based on appraised value.  Others will loan a % based on purchase price.  It is better to find the ones that will loan on appraised value.

They will give you a break down of your fees with these terms.

1 - Loan Points
2 - Closing Costs (Escrow Fees, Document Fees, Notary Fees)
3 - Interest Amount

So a typical lender might say:

I will loan 60% of ARV (appraised repaired value), with 5 points, 500 in document fees and a 6 month interest only balloon payment loan at 10%.

To translate on a deal that appraises at 200,000.
They will loan you up to 60% (140,000).  To get the loan you will pay 7,000 in points + 500 in document fees, and you will pay 1,167.67 on the loan, until you sell the property or 6 mos is up. They will take a trust deed like a typical mortgage and make you sign the other documents like a typical mortgage.

You should probably get the names of lenders before you present a property and pre-qualify with them.  There lending requirements are sometimes different then a traditional mortgage (they are most worried about the amount of cash you have, your level of experience, the specific deal and your credit).

Typical process.

Step 1 - Prequalify: talk to the lender and see what they require.

Step 2 - Put a good deal under contract

Step 3 - Call the Hard Money Lender mention what your contract price is, the estimated cost of the repairs, what you think the ARV value is.

Step 4 - They will either send their appraiser or give you an approved list of appraisers and you will get the property appraised.

Step 5 - They may request some of the escrow documents to verify.

Step 6 - They will agree/disagree to do the loan.  They will tell you what amount and what terms it will be one.

Step 7 - You fund an amount to escrow, and they will fund an amount.

Hope that makes sense.