Hard money loans are a type of loan that uses real estate as collateral. Hard money loans are different than bank loans because they are funded by private investors or a group of investors. The money loaned is usually fixated to a 12-month repayment term; however, those terms can usually be extended to five years. The loan is repaid every month by paying the interest or interest plus principals. Most often, hard money loans end with a balloon payment at the end of the term.
Since hard money loans use real estate as collateral, the amount of money that can be loaned usually depends on the value of the collateral. Banks and other establishments might refuse your loan, but money lenders will not. Since it uses real estate as collateral, the lenders are perfectly safe knowing that if the client cannot repay, they will use the property to pay off the loan. That way hard money lenders are always making safe loans.
What types of property do hard money lenders accept?
In most cases, hard money lenders will accept any form of property whether that’s a single residence home, a multi-residence home, land, commercial land, industrial land, the list goes on.
However, not every hard money lender has experience with all types of property, so some of them might specialize only with residential property rather than land.
Interest rates of hard money loans
The interest rates of hard money loans are different in each state and with every lender. Some like, hard money loans Texas, offer much lower rates since there are more lenders in the state of Texas. In some states with fewer lenders, the rates are higher because the competition is smaller. The math is simple, the more competition means that the interest rates are smaller and prices are lower.
Since hard money lenders take a bigger risk than banks, their interests are much higher. Interest rates for hard money loans usually range between 10% and 15% and they depend solely on the lender. Furthermore, points can range between 2% and 4%, and they also depend on the loan to value ratio.
How to determine the loan amount to value?
As we mentioned earlier, the amount of money you can loan depends on the value of the property, which is calculated by a ratio of the amount divided by the value of the property. Most often, hard money lenders will offer a loan of up to 75% of the value of the property. If you’re loaning money to improve the property, then lenders will offer you an amount equal to the same percentage of the value of the property after the borrower has improved it. This type of loan is not as safe for lenders because they put in more money and the burrower’s capital decreases. If a risk occurs during this loan, the lender might charge higher fees for the repayment process and interest rates.
In some cases, hard money lenders have offered a higher percentage of the ARV value (after repair value). They can even finance the renovation costs but expect to see higher interest rates somewhere between 15% and 18%. Furthermore, the points ratio will also be increased between 5% and 6%.