Privately funded temporary financing is referred to as hard money. Hard Money Loans are not designed for permanent financing. The costs of hard money loans are not cheap, so should be paid off quickly, as soon as your investment property is completed or flipped. Loan costs for hard money loans are usually around 11 and 19%, and have upfront fees between 3 and 4 points up front.
Purchasing investment properties with no money down is challenging, but it is possible if you can prove that the value of the property is more than the hard money loan amount.
When should hard money loans be used?
Hard money loans should only be used for short term real estate investments. They usually are only approved if the investment is worth at least 20% more than the amount financed. If the investor plans to keep the investment as a long term investment, the Hard Money financing should only be used as a bridge loan, to bridge the gap until the investor can get a mortgage loan.
Occasionally there are used by homeowners in distress who need a temporary solution to avoid a foreclosure. Because hard money brokers generally base the loan on the value of the property, and not on the credit of the borrower, they will lend to people with poor or bad credit, if the home has a substantial amount of equity. Hard money loans for distressed borrowers are usually just a temporary solution. Private hard money lenders will generally foreclose on properties as soon as a payment is missed.
What makes a hard money lender good?
When choosing hard money lender you need to consider how quickly the lender can get you the money, the cost of obtains the loan, the monthly interest rate, and other terms. You should also consider how liquid the loan will be, how quickly they can get it to you if you find a great deal that needs a quick closing. If your private money lender takes several weeks to get financing to you, you’re probably better off getting traditional financing, and will miss out on the opportunity to purchase a deal at the trustee sale good bye.
