What Hard Money Loans are and How They Work

What Hard Money Loans are and How They Work
What Hard Money Loans are and How They Work
September 6, 2016

If there is one business that has the most variety of loans at their disposal, it is the real estate business. One of the most valuable forms of loan available to them is the hard money loan. The name of this loan is already suggestive of what it is used for. If you are still confused or hearing about it for the first time, the next paragraph would tell you all about it.

Hard money loan is used to refurbish properties

There are some properties that are worth gold but their value will only come out if they are refurbished. Hard money loans are used by investors to repair investment properties after they have bought them. When the money is not there to purchase a property, hard money loan can also be handy to make up the money.

Read also: Merits and Demerits of Purchase Money and Non-purchase Money Loans in Short Sales

Scope of Work for seeking hard money loan

Hard money loan lenders would only require the loan seeker to submit their Scope of Work worksheet. This worksheet should contain all the planned repairs the investor plans to undertake on the property. Hard money loan lenders use the worksheet as a guide to payment of the investor for the project. A repair that was not properly captured in the worksheet would not be refurbished.

Hard money loan requires less amount than traditional bank lending

The requirement for an investor seeking hard money loan is not as back breaking as that required by the traditional bank lending. Real estate lenders would on most cases demand for twenty percent of all projects. Also, there should be a certain amount of money you should have in the bank. Besides these, the monthly income of the investor can increase the confidence of the lender. But bear in mind that different lenders would have their different unique requirements.

Read also: A Cash Business Loan might Just be Perfect for a Working Capital

Overestimation is encouraged among investors

Unless you are the one selling the repair kits and doing the repairs yourself, you can and will never get the exact cost because prices of services and other necessary materials may fluctuate during the time of the repair. Overestimation is encouraged among investors so that such fluctuations would not have any hard affect the project later on. Peradventure the initial estimate turns out to be perfect, and then the excess can be returned or kept as the investor pleases.

Lender will inspect property before disbursing fund

When the repair of the property reaches some extent, the investor can approach the lender for refund. The lender would then send out a team of inspectors to go and monitor the said project. If the work has been done according to the said guideline, then the lender will make the payment as stipulated in the Scope of Work document (the main reason why this document must contain all the work done). The entire process is what is referred to as a ‘Draw’.

Read also: What You Never Knew about the Small Business Administration Loans

Refinancing is the most important part of property repair

Hard money loans are short term loans and their interest rate can be considered high at fifteen percent. Hard money loan lenders know the amount of risk involved in what they are doing and that is why they would want to know what is in for them upfront. The risk is what propels them to set such a high interest.

High interest makes investors act fast

Because of the high interest rate, investors would need to either sell the property quickly or have it rented out so they can payback their debt or they find themselves in huge debt.

Read also: Looking for Ways to Finance Your Company: Try Asset Based Lending

Article highlights

  • Hard money loans have high interest rates.
  • This type of loan is used majorly for purchase and repair of properties.
  • High interest rate is responsible for the quick decisions of investors.
  • This is a short term loan.
  • Always have plans to pay back as quickly as you can.
  • Only expenditures contained in Scope of Work will be refinanced.
  • It is better for investors to overestimate than underestimate.
  • Excess money from estimate can be kept or returned by the investor.
  • Real estate lenders mostly demand for 20% of the project.
  • Some properties would worth ten times the value when refurbished.

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