Questions about hard money loans

[julien515]

I'm trying to understand how exactly a hard money loan works but there a few things about it that I'm still confused about. My understanding is that a hard money lender will typically lend me 60-70% of the potential ARV value of the house. Would I need to make a down payment to get this loan? and will the loan typically cover the total cost of the property because if 60% of the ARV doesn't cover the cost of the house would I have to pay for the difference myself? and what about the repairs do I have to pay for that or will the lender cover it?

Also how long is the term for a hard money loan typically, a year, 2 years? and how often is it compounded? A 12% interest rate on a loan compounded weekly for example could result in me actually paying around 15% or so by the end of the year.

If someone could give me a scenario of a hard money loan that they made or received that would be much appreciated as it would answer most of these questions.

 

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[workingtitle]

Hard money lenders typically try to loan on deals that hover around 50% LTV (Loan to Value). They do this because if you don't pay they have to go through the trouble of foreclosing on your property. They need to make sure they can make some money off of the hassle.

These are short term deals (12 mo) that yield roughly 8-12% interest. The interest is based off of the principle investment.

This is all done through a title company that acts as the intermediary between you and your lender.

For example: I lend you $100k at 12% over 12 mo. on your $200k property.
At the end of 12 months I'm going to have received a total of $112k from you. my $100k principle and my $12k interest.
Your property has a 50% LTV which is great if you don't pay and I have to foreclose on you.
I get all my checks from the title company. They pay me once all the papers are signed.

All hard money lenders are different but this is generally how it works. They're all different because they're acting as their own individual banks and because of that they make their own rules. They know you can't go to a normal bank so they're going to charge you accordingly.

 

[Red]

With a hard money loan, a "typical" (and there is no typical, it's whatever is negotiated) scenario is:

25-40% of your own cash down (they don't give you money without you having skin in the game too)
60-75% LTV
A few points up front (a point is typically 1% of the total loan).
Shorter terms, from 6 months to 5 years with a balloon payment due at the end (balloon = rest of loan due back)
APR anywhere from 15% - 25%

I just received some spam the other day for a HML & will paste the details below so you can call & ask them yourself. They're advertising 14.99% with no points -but don't know the details.

I HAVE NO AFFILIATION WITH THIS COMPANY OR THESE INDIVIDUALS, I DO NOT PROMOTE THEM, UTILIZE THEM, NOR HAVE I EVER HAD CONTACT WITH THEM BEYOND THE UNSOLICITED EMAIL THEY SENT ME ADVERTISING THEIR SERVICES. BUYER BEWARE. DO YOUR HOMEWORK.


Gregg Reichman: greichman@activefundinggroup.com
Jody Angel: jangel@activefundinggroup.com
Phone: (602) 252-1155
Active Funding Group II, LLC is licensed with the Arizona Department of Financial Institutions (Arizona DFI) under license number: BK-0925804. We are also registered with the Nationwide Mortgage Licensing System & Registry (NMLS) under license #1097375.
www.activefundinggroup.com

 

[julien515]

Hard money lenders typically try to loan on deals that hover around 50% LTV (Loan to Value). They do this because if you don't pay they have to go through the trouble of foreclosing on your property. They need to make sure they can make some money off of the hassle.

These are short term deals (12 mo) that yield roughly 8-12% interest. The interest is based off of the principle investment.

This is all done through a title company that acts as the intermediary between you and your lender.

For example: I lend you $100k at 12% over 12 mo. on your $200k property.
At the end of 12 months I'm going to have received a total of $112k from you. my $100k principle and my $12k interest.
Your property has a 50% LTV which is great if you don't pay and I have to foreclose on you.
I get all my checks from the title company. They pay me once all the papers are signed.

All hard money lenders are different but this is generally how it works. They're all different because they're acting as their own individual banks and because of that they make their own rules. They know you can't go to a normal bank so they're going to charge you accordingly.

Thanks for the response. I'm still a bit confused though, so the lender will loan me 100K to buy a 200K house..... do I have to come up with the other 88K myself? and will the lender loan me any money for the cost of the repairs and marketing to sell the house once it's ready or do I have to fund all of that as well? It seems like a much worse deal than just getting a traditional loan from a bank plus the interest is way higher, what is the benefit of getting a payday loan?

 

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[PopEmersen]

I just used a HML for my latest flip. He lent me 238k for the purchase and rehab of the home. I bought the home for 205k and estimated I would need 33k for the rehab. I had to bring 37k to closing. The loan is for 6 months, interest only. The first 3 payments are held in escrow so you don't have to pay those, they are released to the lender. The repair funds, 33k, are also held in escrow. I had to do weekly draws meaning I would have the work done, then on Friday inform the lender what was done and how much it costs, and the lender would reimburse me via check.

 

[julien515]

I just used a HML for my latest flip. He lent me 238k for the purchase and rehab of the home. I bought the home for 205k and estimated I would need 33k for the rehab. I had to bring 37k to closing. The loan is for 6 months, interest only. The first 3 payments are held in escrow so you don't have to pay those, they are released to the lender. The repair funds, 33k, are also held in escrow. I had to do weekly draws meaning I would have the work done, then on Friday inform the lender what was done and how much it costs, and the lender would reimburse me via check.

If you don't mind me asking what was the interest rate on the loan?

 

[Red]

Julien, what exactly are you trying to accomplish with your loan?

 

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[julien515]

Julien, what exactly are you trying to accomplish with your loan?

I'm thinking about doing some private lending myself and I'm just trying to get a feel for what type of profit I can make V.S. what the risk is to see if it is even worth doing.

 

[PopEmersen]

15%....seems about standard for hard money. If you can get private funds, go that route, im sure it's cheaper.

 

[Red]

I'm thinking about doing some private lending myself and I'm just trying to get a feel for what type of profit I can make V.S. what the risk is to see if it is even worth doing.

Then in that case, standard APR's are 1-2%, usually 120% LTV & payments are deferred for the first 3 months. No points, ever.

Coincidentally, I'll be your first client.

 

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[SteveO]

The risk is based on your real estate and market knowledge. Hard money lenders can make money in multiple ways. If you play your cards right, you can sometimes get some great properties.