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The Skinny on Hard Money Investment Property Loans

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If you’re anything like me, in the past you’ve probably considered using a hard money lender to acquire an investment property.  Generally speaking, hard money refers to loans from private individuals looking for a handsome return on their money.  Conversely, “soft” money refers to traditional mortgage lending through a regular bank.

A hard money loan can be easier to get compared to a soft money loan in certain situations – for example, if the property’s appraisal comes in too low, if the property is an unoccupied fixer upper, or if you have spotty credit, for example.  However, the downside is that hard money is expensive and always has very stringent terms & requirements.

In terms of their cost, hard money loans always have much higher interest rates compared to regular bank loans.  The average rate is usually at least double that of a traditional bank, and that’s only if you have stellar credit.  In general, hard money rates run from 12-20%, and the worse your credit, the closer to the 20% threshold you’ll be.  Additionally, hard money lenders almost always charge points.  One point is equivalent to 1% of the loan amount, and hard money lenders will typically charge anywhere from 2-10 points.  Thus, on a $200,000 loan, you’d be looking at anywhere from $4,000-$20,000 just to pay for points.  Additionally, it’s very likely that you’ll have to pay closing costs and other miscellaneous fees as well.

There are a few other typical hard money lending terms as well.  One is that they will usually only lend you up to 70% of the ultimate property value.  For example, if you buy a fixer upper for $100,000, put $20,000 into it for repairs, and it ultimately gets appraised for $160,000, a hard money lender will typically lend you a maximum of $112,000 to acquire it.  Additionally, most have very short terms, running anywhere from 6 months to 2-3 years, and many also have prepayment penalties.

All of this begs the question: is it worthwhile to ever use a hard money lender?  The answer is that yes, it can be worthwhile in certain situations, for example if you need to close quickly (less than 30 days) or if your credit is poor.  You could also use hard money to fund the down payment on a traditional bank loan to effectively achieve 100% financing.  Obviously, the only way to make hard money loans work for you is if you’ll be able to refinance after your rehab work is done, so that must be a prerequisite.

If you think hard money is the way to go, the best way to find a good one is to ask members of your landlord association, your real estate agent, your mortgage broker, or to simply do some research online.  Just make sure you shop around to find the best one for your needs.  Good luck!

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