Best Hard Money Loans With 100 Percent Financing
As a real estate investor, you may not have the luxury of getting approved for a traditional small business loan. Whether its a low credit score, a spotty payment history, or lack of down payment, you may find it challenging to find financing. One option to consider: a hard money loan. In this article, we share what hard money loans are, how they work, and where to find them.
Spread The Word On Social Media
Social media marketing should be a core aspect of your advertising strategy. Social media networks, like Facebook and Instagram, are home to billions of people. Showing off your progress, properties for sale and rentals is a smart strategy to achieve instant engagement from potential buyers.
Announcing your intention to start another property investment on social media could attract help from wealthy investors.
Type #: Wholesale Deals
These properties are for sale by other real estate investors. To clarify, the word “wholesale” doesn’t mean “bulk.” You buy each property individually. You just get a “wholesale” price. The investors who sell these properties want to pocket some quick and easy cash by selling you a fixer upper “as is.”
You make bigger cash by buying, fixing, and re-selling. Or you can buy, fix, and rent. It’s up to you. If the deal is right, you should come out on top either way. We compile this list by calling and emailing just about every real estate investor in town, asking them what they have for sale … at a big discount, of course.
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What Is A Hard Money Loan
Hard money loans, also called bridge loans, are short-term funding used in real estate investment. The term hard refers to the hard asset in this case, the property itself. Many investors use these loans to flip properties, and hard money lenders are private lenders looking for a high return without having to rehab or purchase a property themselves. They are most interested in the fundamentals of the deal: the propertys value or, in particular, the after-repair value .
The loan is based on what the lender believes the property will be worth in the future, which differs from traditional lenders who only look at the current value. So you may not need a good credit score to secure a hard money loan.
How To Find A Good Private Money Lender
Private lending is based more on relationships compared to larger banks or even a local credit union. Once a private lender knows theyll be repaid on time and can trust a borrower, the greater the odds are of obtaining funding for future deals.
Since private lenders usually get business through word-of-mouth versus advertising to the general public, they can be a little more difficult to find, but also well worth the time and effort.
1. Understand how private loans work
The first step is to look at a private money loan from a lenders point of view. Unlike a major bank that is backstopped by the Federal Reserve, a private money lender is putting their own personal capital at risk.
In addition to learning about the property and how a private loan will be used to add value, a private money lender will also want to know:
- Will the loan be secured by the property value, a borrowers other assets, or a combination of both?
- How do potential risks compare to predicted rewards, such as getting zoning approved to convert a basement into a studio apartment in order to generate more rental income and force appreciation?
- Does the potential return to a private lender outweigh potential investment risks, like a borrower not completing a project or having a poor track record of success?
- When will a private money lender receive a return of capital and a return on capital ?
2. Create a network of real estate private money lenders3. Create a pitch book for the deal
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You Can Avoid A Lengthy Loan Approval Process:
When you choose a private lender, you can avoid a lengthy loan approval process. Private lenders can approve and fund your property investment within a few days or weeks.
On the other hand, you may have to wait several weeks and even months if your loan application is approved by a bank. This benefit is huge if youre ready to get started with your real estate investment immediately.
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We’re Not Just Another Private or Hard Money Lender
Securing funding for real estate investing can be a challenge and drain your time and resources. Banks are reluctant to provide real estate investing funding, finding private lenders for real estate loans is difficult, and getting a flexible real estate owner-financed loan is next to impossible. Investor Loan Source was designed with you in mind and was created by real estate investors for real estate investors to solve the problems of financing. Our single mission is to provide high-quality investment property loans to private real estate investors with the lowest costs possible.
Our process for providing real estate investor funding is unique. We place more emphasis on the hard asset and value of the collateral and less on the borrower. Our asset-based real estate investment loan model means we can provide more money to more investors than is available from standard bank loan models. If youve been seeking out a hard money loan for a real estate investment, you know that finding lenders who will loan cash for buying and fixing properties on a short timeline is difficult. At ILS, providing real estate investor loans is our business its all we do. We offer several business real estate loan products designed to serve a variety of investor and property profiles.
Looking for more information? Contact us!
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Alternatives To Hard Money Loans
If youre not interested in a hard money loan, consider these alternatives:
- Private money loan: You can reach out to family, friends or others for a private money loan. Although it may feel a bit uncomfortable, it could be an option.
- Home equity line of credit : A HELOC is useful when you want to embark on a home improvement project to increase the value of your home.
- Homestyle® loan: Another option is a Homestyle® loan from Fannie Mae. Its a government-backed mortgage that allows you to renovate your home.
Who Loans Money For Real Estate Investing
It is important to understand that private money lenders are not banks. They may be individuals, or they may be companies, but in either case, they are willing to lend money to investors for real estate purchases that are not as easily funded through banks. For example, attempting to fund an investment with a traditional mortgage is much more difficult than qualifying for a mortgage to buy your primary residence even if you have great credit and assets. Traditional lenders wont loan for distressed, fixer properties, so mastering private money is critical.
As a result, there is tremendous demand out there for money for real estate investments. Private money lenders fulfill that demand by lending money through real estate-secured loans. When you borrow from a private money lender you agree on a set interest rate and time that you will pay your loan back. But with private money lenders, the rates are generally higher and loan periods shorter. The loan is secured by the property and if you dont make your payments on time, just as with a traditional loan, the property can be foreclosed, the lender takes possession and action to recoup losses.
In most cases, a private money lender will focus more on the value of your property and its potential for returns, rather than qualifying you based on your income and/or net worth. There are basically two types of private money lenders.
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Continue Reading Our Private Money Lending Guide Series
Does private money lending sound appealing now? Read Part 2 of our series: A Guide For Private Money Lenders: Breaking Down A Private Loan, for an in-depth guide of what a private money loan really is. If youve had a successful real estate career thus far and have a decent amount of capital in the bank, you can benefit from providing loans for other aspiring investors. There is a specific process that occurs when it comes to generating a private loan. You must get to know who you are borrowing fromare they qualified?while also determining the deals viability. Read on to understand the proper legal documentation such as a letter of intent, a purchase and sale agreement, a preliminary title report, and much more.
And if you are ready to learn how to start attracting investors, read part 3 of our series: A Guide For Private Money Lenders: How To Attract Investors. Part 3 will teach you the benefits loans will provide to borrowers along with the potential drawbacks. Additionally, once youve made the official decision to start your private money lending business, youll need to understand the specific steps of how to get started. Will you focus on residential or commercial real estate? Will you distribute short-term or long-term loans? Do you prefer a more direct or passive income? All of these questions will be addressed when you continue our series.
What Private Money Mortgage Lenders Want
Maybe we should start with what they dont want private money lenders dont want hassles, they dont want to foreclose, they dont want to own the property and they dont want difficulties in earning their returns. Most private money lenders have no interest in being a real estate investor they want to be a private money lender who earns nice returns for the risk involved in funding your property.
Thats the big picture of what they want heres the rubber-hits-the-road things your private lender will want to have from you to consider funding your property.
- The Contract: Most lenders want to see the contract youve executed to purchase the property
- A Summary: Put together a simple summary for your lender. Include the purchase price, the renovation costs, and the ARV supported by comparables.
- Some lenders, especially if you are new to working with them, would appreciate a list of your team. Whos your closing attorney? Your insurance agent? Your contractors?
Put yourself in the position of your lender and ask yourself, if I were loaning someone $100,000, what would I need from them to make the decision to do so? That can tell you everything you need to have ready. And just ask them! Experienced private money lenders already know what they need novice lenders may want even more.
Relationships Are Important
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Hard Money Loan Rates: What To Expect
As noted, hard money loans are expensive. Just how expensive? Lets compare interest rates on these loans to more traditional loan types.
In May 2022, the average rate on a conventional 30-year fixed-rate mortgage was 5.09%, according to Freddie Mac. Hard money loans can have much higher interest rates, often 8 15%.
Hard money loans can also be more expensive depending on the preferred loan-to-value ratio of the lender. If a lender will only finance 70 80% of the propertys value, youll likely need to bring a sizable down payment to the closing table. If you dont have the cash for this, you might have a tough time finding a hard money lender who will work with you.
Advantages Of Private Lenders
Many advantages come with private money loans, especially if youre a real estate investor. Here are a few upsides to obtaining a loan from a private lender.
- The loan terms are more flexible. Since private lenders work alone, investors will have a much easier time structuring loan terms that fit their investment needs.
- The approval process is typically quicker. With many banks and financial institutions, getting approved for a loan is quite a lengthy ordeal. Private lenders usually dont have to adhere to the same rules and can approve a loan in 1-2 days.
- Loans on properties banks wont take on. Private lenders often see value where other lenders do not, and are more willing to take on the risk.
A private lender loan could be a great option if youre a real estate investor looking reliable access to capital to put towards your next investment purchase. A private real estate loan can also be used to tap into your propertys equity with a cash-out refinance.
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The Bottom Line: Hard Money Loans Can Be Risky
Hard money loans can be a useful tool if you need financing through a less traditional route. However, these loans come with high rates and a significant amount of risk if your investment isnt as successful as you hope. In general, hard money loans are best left to the pros.
If youre looking for alternative financing because your mortgage application has been denied, its better to explore other options such as working on rebuilding your credit or applying for a mortgage program like the FHA loan program that accepts people with a less-than-stellar credit history.
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What Is A Bank Lender
Banks are in the business of taking in funds from depositors, paying them a very low interest rate and lending money out to borrowers at slightly higher rates and making a profit from the spread between what they are paying and what they are collecting in interest.
When needed, federally chartered banks can borrow money from the federal government, at a very low rate. Again, the bank can lend these funds out at a higher rate and derive income from the funds.
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The Anatomy Of A Private Money Loan
The concept of a private money loan is relatively simple. Three elements are required for a loan of this nature to transpire: a borrower, a lender, and a lot of paperwork.
For all intents and purposes, private money lending is perhaps your best chance to invest in real estate with no money of your own. If for nothing else, private money loans can provide for investors in need. While they seem to serve the same purpose as traditional lending institutions, several key differences exist. Private money loans typically charge higher rates than banks, but they are also more available in cases an average bank would pass on. Additionally, banks and other financial institutions typically do not provide the same combination of speed and transparency in the decision-making process.
Personal Line Of Credit
A personal line of credit, similar to a HELOC, might be a better idea if you dont have a home to use as collateral. Its still a revolving line of credit, but you might face higher interest charges compared to a HELOC since its an unsecured line. It also means your credit score and credit history are more heavily scrutinized to see if youre worthy of lending money to.
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Us Bank: Best Big Bank Option
Prefer to stick with a traditional bank for your investment mortgage loan? We think US Bank offers your best option.
Many of the big banks avoid investment property lending, but not US Bank. It explicitly allows for investment real estate borrowing. Its investment property loans can be used for standalone homes or rental properties with up to four units. And as youd expect from a big bank, US Bank offers great interest rates.
Of course, as we detail in our US Bank review, US Bank doesnt have the best reviews . So if you dont have a particular reason to go with a bank, we do suggest sticking with one of the better-reviewed lenders on this list.
The Process Of Private Investing
A private lender can invest in a real estate debt fund without having to manage the work that comes with property ownership. Private lenders can also make determinations when it comes to the terms of each loan, and those terms can be customized based on each individual situation and borrower. A private loan typically has a higher interest rate than a comparable loan provided by a traditional lender, but this type of loan may be more accessible to an individual or business that a bank has turned down for a loan.
Private investors will typically review all loan requests that come through and apply their own judgment in making a decision about whether to approve or deny. Their system for analysis may include underwriting, data review, and personal evaluation. A borrower who goes through this process and is approved for a loan can typically get the funds faster than they would when borrowing from a traditional lender. Additionally, the level of transparency provided by a private lender tends to be substantially higher.
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Are Private Lenders Regulated
State and federal lending laws regulate private lenders. Depending on where they are located, there is often a limit to the number of loans they can provide without a license. So while private lenders are not regulated as strictly as bankers, they must follow the rules. For more information on the regulations in your state, be sure to research online.
Understand The Anatomy Of Private Real Estate Loans
Financing terms, especially when youre first starting out, can be quite confusing. Are private lenders the same as hard money lenders? If not, what are the differences?
Basically, private lenders refers to individuals not affiliated with a financial institution who lend funds to promising investors. Either from a private investor or someone within your social circle whos decided to invest in your venture.
Hard money lives in a middle ground between the two. Hard money lenders are usually affiliated with a more traditional financial institution but have less strict standards. Though hard money is technically private money, youll generally want to distinguish between the two as an investor.
In addition, it is essential to know exactly what kind of information a private lender will be looking for. In many cases, private real estate lenders will have experience investing directly in properties themselves. Therefore, they will know exactly which numbers and areas to look at when considering a particular deal. While it is important to build a positive relationship with a potential lender, be prepared to answer questions about the facts and figures of a given deal. Here are a few questions to prepare for when looking for private real estate loans:
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Will they get their money back?
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What is the incentive to invest?
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What are the risks involved?
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How will you secure my investment?
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Is your plan well-researched, and it is achievable?
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