Category: Hard Money

Inside Our Hard Money Loan Evaluation Process

Key Takeaways

  • Understanding the basics of hard money loans is crucial.
  • A fast evaluation process helps real estate investors and others achieve their goal of a speedy loan closing and funding.
  • Legal compliance and detailed documentation are non-negotiable.

Introduction

In the fast-paced realm of real estate investing, getting funding on time is critical for your success. That’s why so many real estate investors depend on hard money loans. Hard Money Loans from Private Money Utah are approved quickly with fast funding so that real estate investors can pounce on real estate deals that won’t last long.

But how do we review real estate deals for viability and evaluate risks as the basis for our lending decisions? 

Let’s talk about our loan evaluation criteria for our hard money loans so you can understand how this hard money lender approves and declines loans.

Understanding the Basics of Hard Money Loans

What Are Hard Money Loans?

Unlike conventional loans, hard money loans are primarily asset-based loans, which is one factor that helps expedite the approval process. Hard money loans get their name from using hard assets as collateral such as real estate.

What Type of Borrowers Use Hard Money Loans?

There’s a common myth out there that only desperate or bad credit borrowers are those willing to pay the higher interest rates typically associated with hard money loans. But this couldn’t be further from the truth! In fact, there are so many reasons that people use hard money loans, in fact, some may surprise you. Discover the many reasons why people get hard money loans in greater detail here, and see how many of these reasons turn out to surprise you! 

Our Evaluation Process- How we look at a real estate deal

Our evaluation process for a loan is:

  1. Borrower and/or other third parties provide information about the property being used as collateral for the loan and the borrower.
  2. We review all of the information provided by the borrower and other third parties. We verify that the information is accurate.
  3. After we’ve reviewed all of the information and documentation for the loan file, we do a risk analysis to determine if the level of risk is acceptable.
  4. Once we’ve determined if the level of risk is acceptable, then we price that risk and present the final loan terms to the borrower. 

The subsequent sections will go deeper into the evaluation criteria, legal compliance, and other facets of our due diligence process before approving a loan. For a sneak peek into some real estate deals evaluated and funded by us, check out our Recent Loans Closed section.

Real Estate Deal Evaluation Criteria: The 5 Cs

The 5 Cs are the criteria that make up our evaluation framework in order to fund a hard money loan. The 5 Cs are: Collateral, Character, Cash, Credit, and Cybersecurity.

Collateral: 

Property Use: A thorough review of the property that will be used as collateral for the loan is one of the aspects of asset based loans. The borrower must be ready to provide all of the available information about the property to the lender, including some information that may not be readily available.

Understanding the zoning laws and land use regulations is essential for any lender before lending on a property.

Is there an HOA that regulates property usage? Is the property located in a special district, etc.? Is there a factor about the location that will make the property less desirable? Is there access, or is some sort of easement required? These are just a handful of aspects about the property that a lender looks at when evaluating a loan opportunity.

Property Value: Do the numbers work?

      1. Loan to Value (LTV) Ratio: This crucial metric mirrors the loan amount against the value of the property, or the purchase price, whichever is lower typically. Most hard money lenders lend a certain percentage of the purchase price for a property on purchases, rather than on the appraised value. Because every hard money lender is different, find out what your lender’s max LTV is on purchases and on refinances.
      2. BPO of value versus a Professional Appraisal: Hard money lenders use a variety of methods for valuing a property. Depending on the complexity of the loan, or if a lender doesn’t understand the market well, a lender may choose to go with an appraisal to determine a value for the property.  However, if a lender understands the market well, or needs to close the loan in a hurry, a lender may opt for a Broker’s Price Opinion, often called a “BPO,” to determine a value for the property.  But it’s not as easy as just ordering an appraisal or a BPO. A lender really needs to analyze the report, talk to real estate professionals, and run the numbers, especially on income-producing properties.
      3. Purchase Price Evaluation: If the loan is being requested for a purchase, we must analyze the purchase price against the as-is value of the property. Is the asking price for the property based on its future, intended use? Or is it based on a future value or future rents? If the borrower is paying a lot more for a property as compared to its as-is value, the borrower may need to bring in a larger down payment.  This is because a lender may not be able to rely on a future value given that it requires the work of the borrower to achieve the future value. And if the borrower doesn’t take the action required, there may not be a future value that a lender can count on.Cap rates are something to factor in as well, particularly on a purchase of an income-producing property.
      4. After Repair Value (ARV) and As Completed Value: Typically for Fix and Flip Loans, and construction loans, the “ARV,” or the “As Completed Value,” provide a future property value after repairs are made, or after construction is completed.  Loans that rely on a value at a date in the future, are always higher risk, so a lender must consider all of the potential risks to achieving a future value and how those additional risks can be mitigated.

Ensuring a Clear Title: A thorough title search is imperative to ascertain that the property is free from any liens or litigation. 

Access to Water: Particularly in drier states, water is very important in real estate, so always make sure the property has a source of water, unless the property is on city water. And if a well is required, does the property have a well permit in place, and if not, are permits available in the area where the property is located?

Character: Borrower’s Experience with the Property Type & Track Record 

Evaluating the borrower’s character is not what it seems on the surface. We are not looking at personality traits or moral standards, we are looking at the borrower’s experience, track record, and history.

The questions that should be asked include: Does your borrower have real estate investing experience with this particular property type that is being used as collateral for the loan? Can your borrower carry out the type of project being proposed?

Does your borrower have the track record and experience that can be relied upon?

Cash: Borrower’s Financial Assessment

While the primary focus is on the property, understanding the borrower’s financial standing provides a larger picture of the risk involved. Higher risk doesn’t mean a loan will be declined, but the final interest rate or fees may reflect a higher risk.

Down Payment or Cash Equity: What size down payment is the borrower bringing in on a purchase? If it’s a refinance how much cash equity does the Borrower have in the property?

Cash Reserves: Does the borrower have adequate cash reserves to cover any unforeseen circumstances that may occur? For example if it’s a construction loan, or renovation project, does the borrower have reserves to cover budget overruns? ”

Number of Projects in Process: How many other projects does your borrower have going that require cash outlay? If a borrower has several other projects or businesses that may require more cash outlay, a lender may be hesitant to do a loan.

Having too many projects going at once that all require cash outlay by a borrower is a red flag because it indicates that a borrower may find him or herself in a cash crunch position.

Credit:

Most hard money and private money lenders lend to borrowers with poor credit, and many of them do not have a minimum credit score requirement. However, many lenders will require a credit report to mitigate fraud. In higher risk loan transactions, such as value add real estate deals, or construction loans, credit may become a more important factor in loan approval.

Cybersecurity & Fraud:

There are several areas to a loan transaction that can invite fraud. Since everything is done digitally and online these days, it has become harder to prove identities of borrowers. When evaluating a loan opportunity, a lender must be aware of identity theft, whereby someone impersonates a real person and attempts to obtain a loan in that person’s name. A lender must have cybersecurity measures and fraud prevention procedures in place to avoid becoming a victim of this type of fraud.

Additional Risk Factors Hard Money Lenders Consider: 

Legal Compliance:

Adhering to State and Federal laws with your lending practices is crucial to managing risk. Are you complying with usury laws in the jurisdiction where you are making loans? And then what are the disclosure requirements for the type of loan you are making? Do you have to comply with certain standards based on occupancy status, or property use? 

Market Conditions:

Evaluating both the current market conditions and the expected future conditions helps in understanding the potential growth or potential depreciation of the property’s value.

Where are you in a real estate or market cycle? Are interest rates expected to go up, and if so, what interest rate and for what term would be appropriate for a given loan? Are there a lot of properties for sale at the same target price point that your borrower is planning to resell a property you are loaning on?

Exit Strategy: How will you pay the hard money loan back?

Assessing the borrower’s exit strategy—whether it’s selling the property or refinancing—and testing the viability of that exit strategy is critical. What is the borrower’s plan for paying the loan back, and is that a viable plan? Always ask your borrower for a secondary or tertiary exit strategy. Sometimes other information will be required to determine if the borrower’s exit strategy is viable, particularly if the exit strategy is a refinance. If a borrower has poor credit or not enough cash equity, the chance of a refinance as an exit strategy lessens.

Changing State and Local Regulations:

Are there any pending state or local regulations that could affect the property, or the future property use? For example, if the property is a short-term rental, will pending regulations affect the property use in the future, and if so, how will this affect your exit strategy on the loan?

Environmental Considerations:

Does this area have any known environmental issues? Is there a property nearby that could pose future environmental problems such as proximity to a dry cleaners, automotive repair shop, a printing shop, etc.? If the property is located near to a property that has created environmental contamination, it may have also been contaminated.

Changing Flood Maps:

Lenders use flood maps to determine whether flood insurance is required. However these maps are not meant to be predictive and lenders considering whether flood insurance should be required should take into account the overall flood risk to the property. “Maps do not forecast flooding. Maps only reflect past flooding conditions and are a snapshot in time. They do not represent all hazards and do not predict future conditions,” said Michael Grimm, former deputy associate administrator of FEMA’s Federal Insurance and Mitigation Administration.

 

 

Grimm also identified the challenge when it comes to mapping flooding from intense and heavy rainfall, which seems to be a by-product of a warming climate.

Grimm said. “What the maps right now are mainly covering are that coastal flood hazard and the riverine flood hazard for larger riverine watersheds. We know that as climate changes, the impacts are getting worse. We’re seeing more and more flooding going on as a result.”

FEMA is required to review a community’s flood maps every 5 years and then decide whether to update them. Insurance rates may change once a flood map change becomes effective. This is a growing concern for lenders as flood maps across the U.S. are changing, or soon to be changing.

Properties that were once located in 500-year floodplains could be named 100-year floodplains. And properties that weren’t previously at risk of flooding are now at risk due to improper drainage infrastructure of the city where the property is located. 

Insurance Availability:

With a changing climate comes also changes to insurance requirements. Some locations that are insurable now may in the future come with higher priced premiums, or become uninsurable altogether.  If you’re doing a refinance, how likely is it that a property you’re lending on may be uninsurable sometime in the future? If you’re loaning on a flip, or new construction, how will the cost and availability of insurance affect the resale of the property?

Lenders will begin to redline certain locations based on the availability, or not, of insurance as the effects of climate warming are fully realized.

Conclusion:

A lender must take a disciplined and methodical approach when evaluating a hard money loan opportunity. Because there are so many factors to consider when making a loan, potential lenders should not be lured by the promise of superior returns. This naive approach to private money lending can present some fairly predictable pitfalls that most certainly will turn to losses. 

A property loan is extremely complex because a private money lender must have an understanding of many aspects of the property being used as collateral for the loan, as well as the borrower. A lender must fully understand the legal and regulatory framework, the current and future market conditions, just to name a few. Many private money lenders fail to look at the forest for the trees, as the familiar saying goes. New and inexperienced lenders become so focused on the trees, AKA the loan opportunities, that they fail to see the forest around them. 

For a deeper understanding of hard money loans, check out our Hard Money Video Resources and the Recent Loans Closed section of our website.

Deal Evaluation FAQs

What is a Hard Money Loan?
A hard money loan is primarily asset-based financing provided by a non bank lender.

How quickly can a Hard Money Loan be approved?
Loan approval can be expedited, often within a few days, provided all necessary information is submitted to the lender.

What is the Loan to Value (LTV) ratio in Hard Money Loans?
The LTV ratio is a metric that reflects the loan amount against the value of the property.

What is the significance of the After Repair Value (ARV)?
The ARV is the future value of a fix-and-flip property after renovation.

Are there different types of Hard Money Loans?
Yes, including Fix and Flip Loans, Bridge Loans, and Commercial Bridge Loans.

Utah Real Estate Unveiled: An Investor’s Guide

Introduction

Real estate investors who are considering real estate investment in Utah often ask, how do I get started? or, what are the best cities for real estate investment in Utah?

Investing in the Utah real estate market requires research and planning on your part if you want to be successful. And the same thing goes for investing in any new market. In this article I’ll give you some insider tips for successful real estate investment in Utah. As a real estate lender, not only do I review new Utah real estate investment opportunities weekly, but I have a comprehensive knowledge of the Utah real estate market as a whole.

Utah’s economic growth and stability, combined with a growing population, are the primary reasons that real estate investors are investing in the Utah real estate market. In this Utah real estate investing guide, I will provide a general overview of real estate investment in Utah to help you decide if it’s for you.

I will start with a few key factors that make investing in the Utah real estate market an attractive choice for real estate investors. I will also point out a few factors that deter real estate investors from entering the Utah real estate market. I will discuss the best cities for real estate investment in Utah. And then finally, this guide will help you identify a few legal considerations for real estate investment in Utah.


Overview of Real Estate Investment in Utah

Utah’s Economic Growth and Stability

Utah’s economy has seen explosive population growth since 2010 and it spiked right after the pandemic in 2020. With its rapid population trajectory, combined with the current lack of affordable housing, many out-of-state investors have been drawn to real estate investment in Utah.

Utah had the lowest unemployment rate in the nation in 2022, due in part to a regulatory environment that is favorable to small businesses. The low unemployment rate and favorable business climate have spurred all sorts of new real estate investment in Utah. 

Real estate investors are also able to diversify within the Utah real estate market by investing in different property types such as: storage units, residential land development, and short term rentals.

Benefits of Investing in Utah’s Real Estate Sector

Investing in the Utah real estate market offers numerous benefits for real estate investors. Utah is landlord-friendly as compared with California which is tenant-friendly. 

Demand for housing in Utah has been steady since 2010 with low vacancy rates. Property values have also seen steady appreciation since 2010. The real estate market in Utah shows promising forecasts for future growth too, which provides real estate investors the potential for above average returns.

Analyzing Utah’s Real Estate Market

Identifying Promising Areas for Investment in Utah

Utah has several geographic areas that have strong population growth projections, which point to an increasing demand for housing. Some of these geographic areas include, Tooele County, Summit County, Morgan County, Emery County,  Weber County, Cache County, Duchesne County, Washington County, and Grand County.

Property Types and Market Demand

Because each of these geographic areas has its own unique factors, and also because there are a diverse range of property types to choose from, you really need to decide “where” and “what,” before you make any real estate investment in Utah. 

For example, some of the areas I’ve listed are tourist destinations, so real estate investors who are focusing on short term rentals would start by looking in those areas. Some areas in Utah are still very rural and have low housing inventory, but projections show future growth. These areas will attract real estate investors who are targeting all property types including fix and flips, long term rentals, or residential spec construction. 

By carefully researching the different geographic areas in Utah and measuring current and future market demand, a real estate investor can determine if a particular property type would be a fit for that area. For example, in a city with a large number of apartment complexes, a self storage facility may be a desirable property type in that city.

Utah Rental Market Analysis

The rental market in Utah is driven by the factors already mentioned including: population growth, job opportunities, and a robust tourism industry. By obtaining a thorough rental market analysis from a local real estate broker or property manager,  you can identify areas with high rental demand, areas with rental rates that cash flow, and areas with potential for rental income growth. 

Unfortunately for investors in long term rental properties, ever since 2016 when Utah property values really started to increase rapidly, rental rates didn’t rise as fast as prices. And then prices spiked, from the end of 2020 through the spring of 2022, making it even harder for investors in long term rentals to find properties with cash flow.  

At the time this article was written, it was difficult to find a rental property in Utah that cash flowed. For this reason, many real estate investors in Utah have purchased rental properties in recent years with the goal of future value appreciation, rather than with an expectation of cash flow.

Factors to Consider Before Investing in Utah

The Legal Considerations for Real Estate Investment in Utah

Before diving into real estate in Utah you must first have an understanding of the legal considerations for real estate investment in Utah. For example, the regulatory bodies that govern businesses and real estate in the state. The Division of Real Estate governs all things real estate and mortgage in Utah. And the Utah Division of Corporations governs all things business. Familiarize yourself with Utah real estate laws, its property ownership laws, landlord-tenant laws, and property management regulations. 

What individual name or business entity name will you be doing business in Utah under? Are you setting up a Utah business entity, or are you operating under a foreign business entity that should be registered in Utah? Consult with a CPA that understands your tax goals and can suggest the right type of business entity structure that would be best for you. 

Utah is in the top 10 states with the lowest property taxes. The Utah State Tax Commission is the entity where you file and pay your income taxes. Find a CPA that has experience working with real estate investors and can provide advice on tax strategies based on your specific real estate investment goals.

 

Additionally, explore any tax incentives or exemptions available for certain types of investments, such as historic properties or renewable energy projects.

A knowledgeable realtor in Utah is the type of advisor that can help you navigate Utah real estate investment opportunities. But consult with a real estate attorney on more complex real estate matters such as complicated contracts or partnership agreements, title, land, and development, are just a few areas where legal advice is essential. 

Short Term Rentals (STRs) in Utah are regulated in Utah all the way down to the local level. They can be regulated by the County, but in some cases it’s left up to the municipality, i.e. town. And then any short term rental may also be subject to the jurisdiction of the individual Homeowners Association (HOA) where the property is located. Always do careful research to make sure STRs are allowed at the properties you are targeting for short term rental investment purposes.

Financing Options and Strategies

How will you fund your real estate deals in Utah? To have multiple financing options is crucial for success in real estate investment in Utah and in any real estate market.

There are a variety of financing avenues for purchasing real estate in Utah, including traditional mortgages and hard money loans. But you must first figure out what your investment strategy is, and what your long term goals are for a property. Then take your goals to a good mortgage broker, or other seasoned financing pro. 

Corey Dutton, a private money lender based in Utah, is one of those seasoned pros who’s both a mortgage broker and a private money lender. Professionals like Corey can help you decide how you will fund your purchases of investment properties in Utah based on your short term and long term goals. 

The real estate market in Utah is competitive. Motivated sellers may sell properties at a discount but only to buyers with cash, or fast funding hard money loans. Unless you’re planning to come in and purchase with all of your own cash, you should consider getting preapproved with a hard money lending company before you start your search for real estate investment properties to buy in Utah. 

The best Utah real estate investment opportunities, like anywhere, never last long. In order to compete in a competitive real estate market, you need to be ready to purchase with all cash. But most real estate investors don’t have large amounts of cash on hand. For this reason, most real estate investors use hard money loans to purchase real estate investment properties and then either sell or refinance to pay off the loans. 

Hard money lenders in Utah are your best source for fast loan approval and funding to give you a competitive advantage. Make friends with a good mortgage broker, and a good hard money lender, in Utah. They can both give you advice on how to best finance your properties and accomplish your real estate investing in the Utah real estate market. A lot of traditional mortgage brokers don’t understand how private money loans work so make sure you also get to know a good hard money lender in Utah.

 

Top Tips for Successful Real Estate Investment in Utah

Build a Strong Network of Professionals and Team of Advisors

Seek the expertise of real estate agents, attorneys, and tax advisors who specialize real estate when investing in the Utah real estate market. They can guide you through the intricacies of local regulations, assist with property transactions, and ensure compliance with applicable laws. 

Collaborating with local real estate professionals can provide you with valuable insights when investing in any new market. Connect with local property managers, contractors, and title companies, lenders who have experience in the Utah market. They can provide not only guidance, but also potential investment opportunities. 

Building relationships with professionals ensures you have a team to support your investment journey in Utah that can help you navigate any challenges that may arise. How do you network with, and learn from, local real estate professionals? Consider joining a local chapter of any Utah Real Estate Investor Club, or local Real Estate Investor Association, there are several scattered across the major geographic areas in Utah. 

Understand Legal and Tax Considerations of Real Estate Investing in Utah

Having a solid team of professional advisors is key to your success. Real estate attorneys, experienced real estate brokers, and seasoned tax professionals are a few of the types of advisors that you need on your “team” to help you accomplish your goals in real estate investing in Utah. Without them, you are just finding information on the internet somewhere and trying to do it all yourself. Never cut corners or cheap out when it comes to the right professional advice.

Conduct Thorough Market Research

Thorough market research is the foundation of any successful real estate investment. Make sure you carefully analyze historical trends, that you evaluate current market conditions, and then make future projections of profits, income, etc. Your numbers work, or they don’t work. And if the numbers don’t work for what you want to do with the property, then move onto the next deal quickly. The sooner you make a decision to proceed with the investment property purchase or not, the closer you’ll be to the right one. 

In Utah, you need to look for areas with potential for job growth, city center initiatives favoring growth, and expansion of infrastructure. Identify neighborhoods or cities that show potential for appreciation from high rental demand. Whatever your exit strategy is for the real estate investment property, all of these factors play an important role in your success in a particular neighborhood or location.  


Implement Effective Property Management Strategies

Efficient property management is crucial for optimizing returns and maintaining the value of your investments. Whether you choose to self-manage, or hire a professional property management company, establish effective systems for tenant screening, rent collection, maintenance, and lease agreements. Good property management ensures a profitable operation by minimizing vacancies, and saving money where possible, while also staying on top of maintenance. 

Best Cities for Real Estate Investment in Utah

Salt Lake City: Growth Drivers, Investment Opportunities

Salt Lake County is where the capital, Salt Lake City, is located. Salt Lake City is one of the fastest growing cities in Utah for multifamily (apartment construction) in recent years. With several colleges and universities, and 3 ski resorts, Salt Lake City has seen a steady demand for housing over the past 10 years. 

If you can find a rental property in Salt Lake County at the right price where the rental numbers work, take it down. There are a lot of older, dated homes in Salt Lake City, which presents future opportunities for fix and flips or other value add plays. That is, if you can purchase the properties at low enough prices. 

Because of the high demand for housing in Salt Lake City, a recently renovated, well designed home can often demand multiple offers. Margins have been getting tighter in recent years with so much competition among real estate investors in Utah for both fix and flip, and rental investment properties in Salt Lake City, Utah.

Salt Lake County has a robust job market with a growing population. There has been a revitalization of areas of downtown Salt Lake City in recent years with the development of new residential and commercial. But many multifamily real estate investors wonder if the multifamily market is saturated with new inventory in Salt Lake City. 

If Salt Lake City is saturated with new construction and multifamily properties, maybe a better play is converting commercial properties to affordable housing, or workforce housing. Land prices are always a factor that real estate investors need to monitor in new development projects, especially when developing affordable housing or workforce housing. And with land prices at historically high levels in Salt Lake County at the time this article was written, these types of projects don’t prove as profitable as high density, multifamily projects. 

Park City: Tourism and Rental Potential

Summit County is renowned for its world-class ski resorts and vibrant tourism industry. It attracts visitors from around the world, offering excellent opportunities for vacation rental investments and second home ownership. Park City, the cash cow city for Summit County, hosts major events like the Sundance Film Festival and large scale summer events and festivals that draw visitors. For this reason, Park City made my list of the best cities for real estate investment in Utah. Additionally, Park City’s charm and natural beauty make it an appealing location for luxury residential properties for use as short term rentals, as fix and flip investments, or spec construction.

Provo & Orem, UT: Student Housing & Household Formation 

Utah County has been one of the fastest growing counties in Utah in recent years, and among the fastest in the nation. According to U.S. Census data, Utah County made the top 10 list of U.S. counties that saw the most growth during the pandemic.

Provo and Orem are two sister cities in Utah County that made the list of the best cities for real estate investment in Utah. These were two of fastest growing cities in the entire U.S. during the pandemic. 

Provo is home to Brigham Young University where student housing has been historically, very highly regulated. Changes to the BYU Student Housing Policy that went into effect in the fall of 2022, have opened up more opportunities for real estate investors near the BYU campus.

And then post graduation, college students in Provo and Orem want to stay locally and raise their families. For this reason, new family formation also drives the housing demand in Utah County. 

Lehi: Technology Industry Influence

The presence of a highly educated workforce and a culture of innovation both contribute to Utah’s economic growth. Lehi has a thriving technology sector, often referred to as, “Silicon Slopes.” Because of the rapid growth in Lehi, Utah in recent years, real estate investors can explore both residential and commercial acquisition and development.

Saint George, UT: The Migration Capital of Utah

There was a lot of migration during the 1st year after the COVID-19 pandemic started. And in 2022 U.S. Census data showed that one the metros in the U.S. that saw the most growth between July 1, 2020 through July 1, 2021 was Saint George, Utah. 

Saint George is not just a migration destination, but it’s also a destination for retirees because of its warm climate, and it’s also a vacation destination for tourists because it’s near 3 national parks. Because of its broad appeal, Saint George, Utah definitely made my list of the best cities for real estate investment in Utah.


Conclusion

Utah has landlord-friendly laws, low vacancy rates, and strong demand for housing that has been steadily growing since 2010. The real estate market in Utah shows promising forecasts for future growth too, which gives real estate investors an opportunity for future appreciation.

But to take advantage of Utah’s real estate investment potential you need a comprehensive understanding of your target counties and cities, and you need to decide what property types you plan to focus on. Whether your chosen property types are residential fix and flip, spec construction, long term rentals, land development, or commercial industrial, you need to know if there’s a demand for that property type in your areas of focus.

There are also legal considerations, tax considerations, and the need to find financing. And then finally, build a network in the real estate investing community in Utah and use a qualified team of professional advisors to guide your journey. 

Still thinking you want to do real estate investment in Utah? Reach out to us to discuss your real estate investment goals and we can help you figure out the best way to fund them.

Understanding DSCR Loans: A Real Estate Investor’s Guide

In the realm of real estate loans, DSCR loans have emerged as an excellent tool for real estate investors. My name is Corey Dutton and with many years in the real estate lending industry, I’ve gained extensive knowledge about various financing options that are available for real estate investors, including DSCR loans. This guide will help explain DSCR loans to you, while offering some insights for you in your journey to finance your purchases of investment real estate.

What is a DSCR Loan?

DSCR, stands for, “Debt Service Coverage Ratio.” This is a term, or type of loan, that is  specifically intended for real estate investors. But why are they for real estate investors? Unlike traditional loans that focus on your personal income for loan approval, DSCR loans have a different approach.

The income potential of the investment property is the driving factor for loan approval with these DSCR loans versus your own personal income. This means that if you have income from non-traditional sources, or if you write off a lot of expenses on your taxes and don’t have a lot of taxable income – – Well, you can still qualify for a DSCR loan on an investment property. 

Now, why is this so crucial? Imagine being an investor with a golden opportunity to snag a rental property, but your personal income doesn’t quite fit the traditional mold. In other words your personal financial metrics don’t align with traditional lending criteria. That’s where DSCR loans come into play. 

These DSCR lenders look more at how much the property itself will earn in income to cover the loan payments over time, rather than the personal income, or the net worth of the borrower. If you’ve snagged a good rental property and can make enough income from the property to support the loan payments, a DSCR loan may be a good fit. Let me tell you why.

 

What Types of Real Estate Can You Buy with a DSCR loan?

DSCR loans cater to a variety of income-producing properties including:

  • Single-Family Rental Property: This includes Single Family Homes, individual Townhomes, Condominiums, and even some manufactured housing.
  • Multifamily Property: Properties with more than one unit, from duplexes all the way to large apartment complexes.
  • Commercial Property: This includes retail, office, and industrial. Pretty much any commercial property that is income-producing.

Mixed-Use Properties: Buildings that combine both residential and commercial elements.

DSCR Loan Programs We Offer

We offer all types of DSCR loans for real estate investors for both the purchase and refinance of investment properties. Our DSCR loans cover a multitude of property types. A summary of the loan terms for our DSCR loan programs include:

  • Property types we lend on: income-producing property types from single family homes, to manufactured homes, from apartment complexes to industrial commercial properties. Most property types are considered as long as the property is income-producing.
  • Under 600 credit score ok
  • Loan amounts up to $50 MM
  • DSCR ratios from as low as 0.85
  • Loan terms: Interest only, 5 year and 7 year fixed, and 30 years
  • Competitive interest rates as compared with banks
  • Low points and fees

Benefits of DSCR Loans for Real Estate Investors

  1. Rental Income Evaluation:
    DSCR loans look at the property’s income potential more than the investor’s personal finances.
  2. Flexibility with Property Type:
    From manufactured or modular housing to multi-unit apartment complexes and beyond. DSCR loans adapt to various property types, freeing investors from traditional loan constraints.
  3. Credit:Even borrowers with low credit scores can qualify for DSCR loans. Some DSCR programs go as low as 580 credit score. But it’s worth noting that the lower your credit score, the MORE you’ll have to bring in down on a purchase using a DSCR loan.
  4. Perfect for the BRRRR Method of Investing:
    Real estate investors can build their real estate portfolios faster using the BRRRR Investment Strategy. Properties can be bought with hard money loans, rehabbed, then rented, and then refinanced with a DSCR loan. Real estate investors are then able to repeat this process over and over again, thereby building their real estate portfolios faster.

How to Calculate DSCR

So how do you know if a property makes enough income to qualify for a DSCR loan? It’s all about understanding the relationship between the income a property generates and the debt  owed on it. Let’s break it down, step-by-step, check it out:

  1. Determine the Net Operating Income (NOI) of the Property:
    Start by figuring out the property’s annual, net operating income. This is the total income the property generates minus its operating expenses. Remember, this doesn’t include any mortgage payments or other financing costs. In this example you will take out your property taxes and insurance as annual, operating expenses to arrive at your final NOI number. (Note: make sure not to include property taxes and insurance as part of the monthly loan payment, otherwise you would be double counting these expenses).

 

Formula:
[  NOI = Gross Rental Income – Operating Expenses (incl. Taxes and Insurance)  ]

 

  1. Identify Annual Loan Payments:
    This is the total amount you’ll pay annually for the property’s debt, which includes principal and interest *(Note: In this example you are not including property taxes and insurance as part of the monthly loan payment).

 

 Formula
[  Annual Debt Service = Monthly Mortgage Payment x 12 months  ]

 

  1. Calculate DSCR

Now, divide the Annual Net Operating Income by the Annual Debt Service. The resulting number is your DSCR or “Debt Service Coverage Ratio.”

 

Formula
[  DSCR = NOI  /  Annual Debt Service  ]

 

Example, if your property has an annual NOI of $120,000 and an annual debt service of $100,000, the DSCR would be 1.2. *(Anything over 1 is good, see below why it’s good).

 

Now what does a DSCR of 1.2 mean? A DSCR of 1.2 means the property generates 1.2 times more income than its debt. 

 

A DSCR of 1 means the property generates the same amount of the debt.  

 

And DSCR below 1 means the property is NOT generating enough income to cover its debt. 

 

Many DSCR loan programs require a DSCR of 1 or higher. If the DSCR is below 1, you can still get the loan, but you will be required to bring in a larger down payment or use your personal income to offset the difference between what your property is earning in income and your monthly loan payment.

What is a good DSCR for rental property?

In the realm of rental properties, the DSCR (Debt Service Coverage Ratio) plays a pivotal role in gauging financial health. A good DSCR for rental property typically hovers around 1.2 to 1.4. This means that for every dollar of debt, the property generates $1.20 to $1.40 in income.

However, it’s worth noting that while a DSCR of 1 indicates break-even, anything below 1 can be a red flag, suggesting potential income shortfalls. If there’s not an opportunity to increase income on the property, it may not be a good investment. As always, individual lender preferences can vary, but aiming for a DSCR north of 1.2 can keep your down payment requirement lower, and keep your personal income out of the equation entirely.

Real-World DSCR Scenario: The Case of Emilio’s Rental Property


Emilio, an ambitious real estate investor, had his eyes set on a rental property in a growing part of town. The property gets monthly, gross rents of $1,600. But Emilio’s personal income, derived from being a subcontractor, is inconsistent. Emilio writes off a lot of his expenses so his taxable income is close to zero. Traditional lenders were hesitant to approve him for a loan to purchase an investment property because his personal income is so inconsistent.

Income Potential:
The property’s potential gross rental income is $1,600 per month or $19,200 annually. After accounting for operating expenses like hazard insurance, utilities, property management fees, and property taxes, the annual, Net Operating Income (NOI) comes down to $15,360.00 annually.

 

Loan Details:
Emilio needs a loan of $175,000 on the property. The terms offered by a DSCR lender are: 7.5% interest rate with a 30-year term, fixed rate, principal and interest payments. This translates to an annual debt service (principal + interest) of $14,683.56 *(excludes impounds for taxes and insurance).

 

DSCR Calculation:

Using the DSCR formula, Emilio calculated his ratio: DSCR = NOI / Annual Debt Service

$15,360.00 / $14,683.56 = 1.04

 

The DSCR in this example is 1.04

A DSCR of 1.04 is a good sign. It means that the property is earning more in rental income than the debt. Another way to look at it, is for every dollar of debt, the property could generate $1.04 in income.

The DSCR lender that Emilio is talking to has a DSCR requirement of 1 for the loan amount he’s requesting of $175,000. This means that Emilio will qualify for the DSCR loan for this rental property because the DSCR is slightly over 1 at 1.04. The lender is not concerned about Emilio’s fluctuating personal income because the rental property has a DSCR over its requirement of 1. Emilio purchased the property in under 10 days using a hard money loan. Once he had the property rented, he paid off (refinanced) the hard money loan with a DSCR loan. 

This scenario shows the power of DSCR loans, but it is also a good example of how real estate investors are using the BRRRR method of real estate investing. delve deeper into the BRRRR method. Real estate investors like Emilio who are building their real estate portfolios typically use hard money loans to purchase properties quickly because a hard money loan can resemble cash transactions. Once the properties are rehabbed and rented, real estate investors are able to refinance the hard money loans into 30 year loans based on the rental income, rather than based on their personal incomes.

 

FAQs on DSCR Loans

Who Offers DSCR Loans?

Traditional Bank Lenders:

Yes it’s true, traditional bank lenders do offer DSCR loans. Banks tend to advertise these loans as “investment” property loans. Although DSCR loans from banks take awhile to fund so don’t think you can use a DSCR loan from a bank to purchase a property quickly.

If you have all the time in the world to close on the purchase of an investment property, a DSCR loan from a bank could be an option. But normally, sellers of investment properties want to sell as quickly as possible, especially if they are selling properties at good prices. The role of hard money loans in swift aquisitions. A hard money loan is typically used for the purchase of the investment property, which is later refinanced by a bank loan.

 

Credit Unions:

Similar to banks, credit unions also offer DSCR loans to real estate investors. Although sometimes faster than a bank, credit unions are still very slow in underwriting and funding loans. So if you want to purchase a property quickly, a hard money loan is your best bet. But make sure to talk with a loan officer at your credit union before you complete the purchase to make sure you understand all of the requirements for refinancing and can meet those requirements. The importance of a planned exit for hard money loans because hard money loans are short term loans of usually one year, with higher interest rates as compared with traditional loans.

Specialty Finance Companies:

These are lending firms that specialize in niche financial products and DSCR loans are often in their long list of loan offerings. Most of them are found online and are more of a broker, or loan wholesaler, rather than a direct lender. 

 

What Are the Downsides of a DSCR loan?

Some real estate investors might find the loan terms of a DSCR loan less favorable as compared with a traditional bank loan. Firstly, they often carry higher interest rates compared to traditional mortgages. Secondly, the loan approval process can take a long time, with lenders evaluating the property’s income potential by ordering appraisals which can often be very slow.

This means it’s very difficult to use a DSCR loan for a property purchase because it’s just not a fast process to get to the finish line on a DSCR loan. If you need to move fast to close on an investment property you would typically use a hard money loan for the purchase and then refinance later with a DSCR loan.

Other downsides are the shorter, fixed rate, loan terms often found in DSCR loans, which means the rate may only be fixed for 5 to 7 years. DSCR loans may also come with prepayment penalties, for example, some with up to 5 year penalties.

This means if you have a high interest rate DSCR loan, and then rates suddenly go down, you’re stuck holding the DSCR loan for 5 years because it has a 5 year prepayment penalty on it. If you pay it off in under 5 years, you have to pay a penalty, and sometimes a very stiff penalty.

And another downside of a DSCR loan is the larger down payment requirements as compared with traditional bank loans. Credit plays a factor in how much down payment you will be required to bring in on an investment property purchase when using a DSCR loan. For example, if you have a credit score below 650, you may be required to bring in a 25% down payment on a DSCR purchase loan.

If you have bad credit and are considering DSCR loans, make sure you understand how your credit score will affect your required down payment. Also if you have a low credit score, find out the loan amount you can get approved for if you’re planning to refinance a hard money loan with a DSCR loan.

Can a DSCR Loan be Owner Occupied?

Traditionally DSCR loans have been the go-to loans for non-owner occupied properties. However, the landscape of lending is ever-evolving.

While it’s less common, some lenders have started offering DSCR loans on properties that are only partially owner-occupied. For example a multifamily property like a four plex, whereby the owner occupies one of the units and rents out the other four units. As always, make sure to check with each individual lender, as the requirements and conditions can vary greatly among DSCR lenders.

Does DSCR include Property Taxes and Insurance?

This concept is a super important thing to understand so don’t skim over this section! When calculating your DSCR, or Debt Service Coverage Ratio, it’s essential to understand what operating expenses are factored into the calculation.

Typically, the DSCR calculation focuses on the annual Net Operating Income (NOI) of a property, which is rental revenue for the year minus operating expenses for the year. In the previous example described above, operating expenses did include property taxes and insurance.

Please note in the above example that property taxes and insurance are not included in the debt payment total. In the above example, the DSCR lender only requires principal and interest payments, the lender does NOT require insurance and taxes to be included in the monthly payments.

On the flip side, some lenders will include the taxes and insurance in the monthly payment amount. This means you will pay these expenses as part of your total monthly payment. In other words, you would pay principal, interest, a portion of property taxes for the year, and a portion of the insurance for a year as part of your monthly payment.

If a DSCR lender does require that you escrow the property taxes and insurance, make sure not to count them as operating expenses.

 

What’s the Down Payment Requirement for a DSCR loan?

As with any loan, the question of down payment is usually the first question. While the traditional amount for conventional mortgages is typically a 20% down payment, DSCR loans can have higher down payment requirements.

This is where credit score and loan size come into play. Typically the lower the credit score of the borrower, the higher the down payment requirement. And likewise, the higher the loan amount over $1 MM, the higher the down payment requirement.

For example, a borrower with a 750 credit score borrowing under $1 MM can get away with only a 20% down payment. While a borrower with a 575 credit score borrowing under $1 MM would need to bring in 35% down.

But what if you have a good credit score of 750, but you’re wanting to borrow $2 MM?
Most DSCR loans over a $2 MM loan amount, even with good credit, require a down payment of 35%. That’s a sizeable down payment if you’re not expecting it! And those with credit scores below 650 may not qualify AT ALL for a DSCR loan with a loan amount over $2 MM.

Conclusion

DSCR loans are a great tool for real estate investors to use for building their real estate portfolios over time. DSCR loans go off the income potential of the property for loan approval rather than going off of your personal income for approval.

This means you can hold multiple properties in your real estate portfolio for between 5 to 30 years using DSCR loans. However, because DSCR loans are typically slow to fund, you can get away with using a hard money loan to purchase an investment property quickly and then refinance with a DSCR loan.

And some DSCR lenders allow your credit score to be below 600, so you don’t need excellent credit to qualify. But be aware that the lower your credit score, the larger the down payment requirement on a purchase with a DSCR loan.

And on a refinance using a DSCR loan, the lower credit score you have the lower the loan amount you can qualify for. This means, you should take your credit score into consideration when looking at DSCR loans for the purchase or refinance of investment properties.

 

 

How to Submit a Hard Money Loan: Tips for Real Estate Investors

Submitting a hard money loan can feel like an intimidating task for real estate investors looking for funding. But if you know how to submit a hard money loan, it’s easy! This blog post will give you the necessary insight on how to effectively submit a hard money loan that will increase your chances of approval and help you get the funding you want.

Using a basic loan summary to submit hard money loans to your lenders is key to successful loan submissions. By following these steps that I outline in this article, you’ll receive the best possible outcome and get funded fast.

To submit a loan to a hard money lender to get a yes or no answer quickly, you need a loan summary and photos. If the property is a fix and flip, you’ll also need your comparables to support your after repair value and an estimated rehab budget.

Here’s your cheat sheet, check this out! Below is a basic “loan summary” and it includes all of the information that a private money, hard money lender will need to give you a yes or no answer. Lenders are busy, and so are you, so use this form to give them a snapshot of the loan, to see if it fits in their parameters.

The below loan summary includes the most important details about the property and the deal that you need funding for such as property address, property description, property value, etc. When a private money, hard money lender gets this loan summary from you, you are going to get his/her attention and you’ll definitely get a yes or no answer quickly. Providing a loan summary to your lender also shows that you’re organized and on top of your game.

What is the most common mistake that borrowers make when submitting hard money loans? It’s so simple that you’ll be surprised to hear that it’s just….property photos! Yes, people almost always forget to send property photos when they are submitting a loan to a private money, hard money lender for approval. Even if you have just one, front, exterior photo, send it to your lender along with this loan summary. The more photos the better!

Keep this tool in your toolbox because you’re going to need it if you want to get funding fast from a private money, hard money lender. And if you have any other questions about loan submissions to hard money lenders, leave them in the comments below.


Property Address: This is the physical address of the property that the loan will be used for.

Property Classification/Type (Residential or Commercial?): This is the classification of the property, whether it’s a residential or commercial property.

Property Description: IF RESIDENTIAL: # of beds/# of baths/sq footage, lot size, garage? Year built? This provides details about the property such as the number of bedrooms and bathrooms, square footage, lot size, garage, and the year it was built.

Property Description: IF COMMERCIAL: How many buildings? Total bldg. sq. footage, acreage, year built. This provides details about the commercial property such as the number of buildings, total building square footage, acreage, and the year it was built.

IF PURCHASE: List purchase price or offer price: If the loan is for a purchase, this will list the purchase price or the offer price for the property.

IF A REFINANCE: List amount of debt to be paid off with new loan requested: If the loan is for a refinance, this will list the amount of debt that the borrower wants to pay off with the new loan.

IF A REFINANCE: Amount of loan fees/ interest reserves requested in addition to base loan amount: If the loan is for a refinance, this will list the additional loan fees or interest reserves requested in addition to the base loan amount.

IF REFINANCE: When purchased? For how much? This will list when the property was purchased and for how much it was purchased.

List amount of repairs or rehab: This will list the amount of money that will be used for repairs or rehab on the property.

Property Value: (based on?) This will list the value of the property, based on an appraisal or other valuation method.

Current lien(s) if not applicable please put, n/a: This will list any current liens on the property, if applicable.

Loan Term Requested (How long do you need a loan for?): This will indicate the length of time that the borrower needs the loan for.

Exit Strategy (How do you plan to pay the loan off?): This will list the borrower’s plan for paying off the loan, such as through refinancing or selling the property.

Use of funds: (Please provide brief breakdown of the loan needs): This will provide a brief breakdown of how the loan proceeds will be used, such as for purchase, repairs, or refinancing.

How soon needed by: (Is there a contract date we should know about?) This will indicate the date by which the funds are needed, such as if there is a contract date to close on a property purchase.

Insurance for Investment Properties: Get it Right!

This is THE MOST forgotten about thing for real estate investors.

You would think that insuring a property would be the most important thing real estate investors do but it’s usually the last thing they think about.

Don’t wait until the last minute before you’re closing on a property to consider the insurance.

Here are some tips for making sure your property is insured properly

  1. Get the right type of insurance for your specific investment property., e.g. vacant dwelling versus landlord/tenant
  2. Dwelling Replacement Coverage: Don’t cheap out, make sure your coverage is adequate. If the cost to build the home new in your market is $250 per square foot, make sure you insure your property at $250 per square foot. If there’s a loss you won’t be able to rebuild the property because the dwelling replacement coverage is not enough to rebuild the property.
  3. Rehab? Make sure your policy has builder’s risk and liability to protect your improvements and protect you from liability if someone is hurt on the job site.
  4. Addtl Coverage: Is your area prone to flooding or earthquakes and does your insurance policy cover those?

This is your life savings in most cases that you’re putting into these properties. If anything your properties should be OVERinsured and not underinsured.

Don’t fall short on your insurance!

Hard Money Loan Prepayment Penalties: What You Don’t Know!

Anytime you’re getting a hard money loan, whether you’re purchasing a property, or refinancing to a lower rate, early payment penalties could cost you. For example, let’s say you have recently refinanced a property but there’s a chance you may sell that property within 12 months of getting the loan. Things happen in life that are not always planned, such as a sudden job transfer to another city, an unexpected divorce, etc.

The bottom line: if you sell a property unexpectedly and pay a loan off early, you may have to pay a steep penalty for doing so. This early payment penalty is called a Prepayment Penalty, sometimes referred to as “PPP,” or a “Prepay.”

What is a Prepayment Penalty

A prepayment penalty? is simply a penalty for paying off a loan early. Many hard money loans, including 30 year mortgages, have prepayment penalties so this is something that all loan borrowers should pay attention to and fully understand.

How Do You Calculate the Prepayment Penalty on a hard money loan?

And what if your hard money loan does have a prepayment penalty, how do you calculate it? A prepayment penalty is equal to the accrued interest from the loan pay off date through the end of the prepayment period.

For example, let’s say your loan has a prepayment period of 3 years. This means if you pay the loan off after 3 years there’s no penalty, but if you pay the loan off prior to 3 years you pay a penalty. In order to calculate the penalty, you will need to know the loan payoff date. If you pay the loan off after 2 years, you will owe 1 year of interest as a penalty. (3 years – 2 years = 1 year). As I said before, the penalty is equal to the interest that accrues from date of payoff to the end of the prepayment period. In this example, you will owe one year of interest as a penalty.

Still confused? Let’s try another example. In the second example, let’s say your prepayment period is 365 days and you pay the loan off in 180 days. This means you will owe the interest from day 180 to day 365 as the penalty, or 185 days of interest (365 – 180 = 185).

Why do Prepayment Penalties for Hard Money Loans Exist?

Prepayment penalties exist because many private and hard money lenders need to make a minimum amount of interest when making a loan. This is because of the high opportunity cost involved for a lender in the commitment to make a loan.

Are Prepayment Penalties Always a Bad Thing?

Sometimes hard money lenders will offer a lower interest rate, or lower fees, on a loan with a prepayment penalty. For example, if you are fairly certain you won’t pay a loan off early, you may be able to lock in a lower interest rate on a loan with a prepayment penalty. If a loan comes with no prepayment penalty, you should ask the lender if there is an option for a loan with a prepayment penalty. Why? Because a loan with a prepayment penalty may come with a lower interest rate, or lower fees.

How Do Hard Money Loan Prepayment Penalties Work?

Because hard money loans tend to be short-term loans primarily used by real estate investors, the prepayment period is usually much shorter than with traditional, long term loans. For example, a hard money loan might have a prepayment period of 90 to 120 days, while a traditional loan might have a prepayment period of 1 to 3 years.

Most real estate investors are using hard money loans to acquire new properties, or for short term, cash out refinances. Because most real estate investors need hard money loans for between 6 to 9 months, they are not so concerned with 90 to 120 day prepayment penalties. Some exceptions are real estate investors who are using hard money loans for short term “fix and flips,” or for fast acquisitions that will be refinanced in 30 to 60 days. If a real estate investor really only needs a hard money loan for 30 to 60 days, it’s important to ask the hard money lender if the loan has a prepayment penalty.

Conclusion

In conclusion, a prepayment penalty is simply a penalty for paying your hard money loan off early.

Anytime you are getting a loan, whether it’s for the purchase of a property, or if you’re refinancing a property that you already own, make sure you always ask if the loan comes with a a prepayment penalty. If you have a sudden life change and pay a loan off earlier than expected, you may have to pay a high penalty for doing so.

Let us know if you have any questions about hard money loans!

You should use a hard money loan for your real estate fix & flip. Here’s why!

Flipping houses can very lucrative if you know how to do it right. But funding flips is the most important because you can’t do fix and flips without the money, right? Real estate investors who are buying fix and flips with hard money loans know that it’s a great way to make money and build wealth fast.

Here’s what you need to know if you’re considering using hard money loans for your next fix and flip.

Real estate investors have limited funding options to choose from when buying investment properties because good deals don’t wait for bank loans or appraisals. This short article will focus on hard money loans and why they are such an attractive option for investors who are interested in doing fix and flips.

What’s a Hard Money Loan and why would you want one for a fix and flip?

A hard money loan is a type of loan that is very different from traditional financing options like conventional loans, or bank loans, because it funds quickly and with less requirements. Example: Most hard money lenders don’t have a minimum credit score to qualify. But like any loan, the borrower agrees to pay back the loan with interest. The interest rates for fix and flip hard money loans range from 10% to as high as 18%.

Why are Hard Money Loans Attractive to Investors for Fix and Flips?

Hard money loans are attractive to real estate investors who do house flipping because they fund quickly and there’s not a lot of hassle in getting the funding. Many savvy investors regularly use hard money to buy a fix and flips because it can fund much quicker than a conventional mortgage loan which can drag on for months.

How to Get a Hard Money Loan for your Fix and Flip

To get a hard money loan, you’ll need to find a hard money lender who is willing and able provide you with the funds that you need for the fix and flip. You’ll also need to be pre-approved by a lender before the lender will agree to loan you the funds, so it’s important that you get started looking for lenders right away.

If you are able to find a lender who is willing to lend you money on a property purchase, they will need the information for the property you are looking to purchase to give you final approval. Most hard money lenders can fund quickly in 3-5 days if there’s no appraisal requirement. Appraisals tend to slow down the funding process so not all hard money lenders require  appraisals determine property values.

The Benefits of Using a Hard Money Lender vs Traditional Financing

The primary benefits of using a hard money lender versus using traditional financing include: the speed of funding, no minimum credit score requirement, and no hassle loan approvals. The speed in obtaining financing can often be the single most important factor in being able to buy a property at a good price and make money!

When should I consider borrowing from a Hard Money Lender instead of going through more traditional means like banks or mortgage companies? In a competitive real estate market, unless you are operating with a lot of cash on hand, you need a loan that can fund as quickly as cash. Many sellers won’t even look at an offer to purchase unless it’s a cash offer. Because our fix and flip loans can fund as quickly as cash, they are essential for funding your property purchases in a competitive market.

explain hard money for fix and flips
https://www.twenty20.com/photos/59cc47cd-0954-4618-a6a1-82c79ed24eaf/?utm_t20_channel=bl

Common Misconceptions About Hard Money Loans for Real Estate Deals

There are a few misconceptions about hard money loans that need to be cleared up and these include:

– Private money loans are offered only to people who have poor credit and cannot qualify for more traditional types of financing. Wrong. Most hard money lenders don’t have a min credit score. Not all real estate investors have poor credit, in fact, many real estate investors who use a private lender actually can qualify for a bank loan.

– Hard money lenders are all loan sharks that charge excessive interest rates. Wrong. Hard money lenders are debt partners for real estate investors, providing the capital they need to make money in real estate investing.

– Hard money lending is the most expensive option for funding investment property purchases. Wrong. Using your own cash  is your most expensive option for funding your fix and flips. And a partnership is also much more expensive than a hard money loan.

While it’s true that many hard money lenders don’t have a minimum credit score requirement, or run a credit check, that’s not the reason real estate investors choose hard money. Real estate investors can use hard money loans on multiple projects simultaneously, building their real estate portfolios faster.

What kind of down payment is needed for flip financing?

Generally, you’ll need at least 20% of your total project cost to get a hard money loan for a fix and flip. But it really depends on each private money lender’s requirements.

Draw Schedule for a Fix and Flip

If a hard money lender provides funds for the repairs to a property, these funds will often be held by the lender in an account called a “repair escrow.” The lender will then release the repair money in draws, or disbursements, as the repairs are being completed.

In order to communicate to the lender how the funds should be disbursed, expect to fill out what’s called a “draw schedule.” A draw schedule should match the bid for repairs, with a cost next to each item, and a grand total at the bottom. But the only difference between a bid for repairs and a draw schedule is that a draw schedule outlines the work in phases so that a lender knows when funds should be disbursed, and who funds should be disbursed to. The lender will disburse the funds to the borrower in “draws” as the repairs are completed, according to the draw schedule.

When to Pay Back the Hard Money Loan on a Fix and Flip

A borrower will need to pay back the hard money loan on a fix and flip property when the property is sold. Some hard money lenders require monthly payments until the loan is paid back, while some lenders do not require monthly payments.

What additional information do you need to obtain a loan for a fix and flip?

Purchase price and loan amount: How much of a down payment will you need?

Rehab and renovation costs: Projected rehab costs can be found by contacting a local contractor and asking them to provide an estimate in writing. Does your lender provide funding for rehab costs?

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Rehab time frame: You want your flip to be completed quickly so you pay less interest to your hard money lender.

After Repair Value: What is the property value after the renovation is completed?

Worst Case Scenario: What’s your exit strategy if things go south? If you get injured, go over budget, or the house doesn’t sell in a timely manner, how are you going to pay pack the loan?

Loan to value: The more money you bring in, the better your chances of obtaining the lowest interest rate.

Experience: Your experience in real estate investing can have an impact on the lender’s decision.

Conclusion

If you’re considering a fix and flip property, hard money is the best option for financing your project.

We’ve outlined some important considerations below that should help you decide whether this route will work for you.

Are all of your questions answered? Remember, no question is a dumb question when it comes to hard money loans, so reach out to us to get more information about how our hard money loans work.  You can apply for a fix and flip loan here.

How To Use Hard Money For An All Cash Offer

Win with hard money in this crazy real estate market

hard money vs cash real estate

In today’s ultra competitive market, you can use hard money the same way as you can use cash. Cash is king in the world of real estate!

The sellers who accept cash offers are seeking a quick and easy sale of their property and do not want to wait for the slow loans of their buyers to fund. By making cash offers using hard money, it can increase the odds of getting an offer accepted on a home purchase.

A hard money loan is similar to an “all cash offer” to the seller because of the speed of funding. You can close a hard money loan in as fast as 24 hours in some cases.

Real estate investors bypass traditional mortgage lenders all the time by making cash offers using hard money.

Why hard money is same as a cash offer on house

When purchasing a property, making an all cash offer can be the key to getting a good real estate deal under contract. But if you don’t have all the cash, how do you use a hard money loan like cash?

Hard money loans are asset-based loans. This means they are not approved based on your personal credit score but rather based on the property that is used to secure the loan. And once approved, a hard money loan can typically fund in less than a week, just like cash. This is why a hard money loan acts the same as, or very similar to, an all cash offer

How to Write a Cash Offer Using Hard Money

Here’s how a buyer can make a cash offer using a hard money loan in 3 easy steps:

Step 1. Get pre approved by a hard money lender

Step 2. Identify the property you want to purchase

Step 3. Submit your offer to purchase and write on the offer, “cash and hard money.” There is no financing or appraisal deadline. The settlement date would be shortly after the due diligence deadline ends. Suggest a title or escrow company as your settlement agent on the contract.

realtors and hard money
buy real estate with hard money

What Real Estate Agents Should Know About Writing an Offer Using Hard Money Loans

Realtors must know how to submit offers using hard money to help their clients get more properties under contract.

Here are 3 easy steps for a realtor to write an offer to purchase a property using hard money.

Step 1: Get a proof of funds letter from the chosen hard money lender.

Step 2: When writing up the offer, under the section that lists how you intend to pay for purchase. Write in the amount of the earnest money deposit.

Step 3: Then write, “N/A” next to “New Loan”. Then write the words “cash and hard money” next to where it lists the balance due in cash at settlement when you subtract the amount of the earnest money deposit.

Step 3: In the “financing and appraisal condition” sections of the contract, make sure it says that the purchase of the property is NOT contingent on financing approval, and is also NOT contingent on an appraisal. Most hard money lenders will pre approve you for a purchase and most do not require an appraisal. Make sure your hard money lender does NOT require an appraisal. If the lender does require an appraisal, it no longer would be the same as cash. Because it takes much longer to get an appraisal, it won’t be able to match the speed of a cash purchase if there’s an appraisal requirement.

Paying back the loan

A hard money lender will give you a specific loan term, which is the time you will have the loan until it is to be paid back. For example, a 6 month term, a 12 month term, or a 24 month term. You will make monthly payments to the hard money lender for the duration of the loan term, or until the date until you pay the loan back.

You only pay interest as you go, so you only owe interest for the time you have the loan. For example if you have a loan term of 12 months but you pay the loan off in 9 months, you only pay interest for 9 months for the time you have the loan. Most lenders do not have early pay off penalties but always ask if there is a penalty should you pay the loan off before the due date. Learn more about ext plans here.

What are the Closing Costs and Interest Rates?

A borrower can expect to pay closing costs of between 2-3% of the loan amount on average. Also part of a borrower’s closing costs would be a loan origination fee or loan points. The interest rates on a hard money loan usually depend on the size of the down payment on a purchase and range from 9% to 12%.

Conclusion

The hard money loan is a cash offer on a house. You don’t need to worry about credit score, long wait times for funding, or other traditional mortgage requirements that banks typically require.

It’s easy for real estate agents and sellers to get started with a hard money loan through our team of experts a Private Money Utah!

If you’re ready to buy now but can’t wait weeks or months while waiting on a bank approval, contact us today and let’s get the process started together!

Let’s talk more about how we could help you pay back this quick closing fund as fast as week by providing an affordable monthly payment option.

Contact us today so we can answer all your questions before making any long term commitments.

Click here for a hard money loan

How To Compare Hard Money Lenders

Download the Hard Money Decision Making Matrix: https://bit.ly/31abLI5 

How to Compare Your Loan Options Among Different Hard Money Lenders

You’re looking for hard money lenders and there’s a million hard money lenders to choose from. So how do you compare among hard money lenders?

Well, most people start with the interest rate and compare lenders using that metric only. Let me tell you, if you’re looking for a hard money loan based on price alone, you’re making a huge rookie mistake!

A guy comes to me the other day and he’s shopping for hard money lenders. During our phone conversation he interrupted me in the middle of the conversation to say, “I’ve already gotten a quote of 10% from another hard money lender.”

And then I asked him, “Your lender at 10%, what are his requirements for final loan approval?”

The guy answers, “I don’t know. “

And the I asked him, “How much is he going to loan you for the 10%?”

He replied with the same answer, “I don’t know.” This guy didn’t know anything about the loan amount or requirements to get that 10% loan. 
Not only was he wasting my time, but he was wasting his own time.

Don’t waste your time when you’re shopping for hard money lenders! If you want to find the right lender for your needs, I’m going to teach you how to compare and choose the right lender.

Using a Hard Money Decision Matrix

Write down, or type out, your biggest need for a hard money loan. And what do I mean by that?
What if you need to close in 3 days? Then your biggest need for that deal is the speed of funding.

And what if you don’t have any money to bring into the deal and you’re really low on cash? Well then your biggest need is finding a hard money lender with the lowest down payment requirement.And then what if you have bad credit and no income? Your biggest need is going to be a hard money lender that doesn’t base the loan approval on your credit or your income.

Now I want you to create what’s called a decision matrix. Look it up online. Studies have proven that if you write down all your options and have them in front of you, you can make better decisions.

That’s what I’m going to ask you do right now, create your own decision matrix. And on the left side of the chart I want you to list all your hard money lenders that you’re talking to. And then each column in the chart is going to be a factor that you’re going to use to compare your hard money lenders. There are a lot of factors that you can use to compare your hard money lenders but I’m going to talk about seven important factors.

What are the seven factors for comparing among different hard money lenders? They are.

  1. Method of valuation
  2. Speed of funding
  3. Requirements of funding
  4. Cash to close requirements
  5. Reviews about the lender
  6. Monthly payments required?
  7. Total cost of the loan

Let’s start with the first factor for comparing lenders, it is Method of Valuation.

This means, ‘how is the hard money lender valuing a property? Are they using an appraisal? And if so, what’s the cost and timeline for getting it? Is the lender using a broker’s price opinion, and if so, what’s the cost and timeline for getting it? Find out the answer to that question!. This is extremely important, as you’re going to find out shortly as we go through some of the other factors.

The second factor for comparing your lender is, the Speed of Funding.
Just because a hard money lender’s website says that they can fund in 5 to 10 business days, it doesn’t mean that they can actually do it.
And why? Because if a lender is going to require an appraisal as the method of valuation for example, there is no way that lender is going to be able to close your loan in 5 to 10 days. It takes 2 to 3 weeks to get an appraisal back in most cases.

The third factor to use to compare is, the Requirements of Your Hard Money Lender.

What are the lender’s requirements for loan approval? This is the one that is going to require the most research on your part. You need to find out ALL of the requirements of each lender and make a list for each.

Let’s say you decide to go with a lender with a low interest rate but you didn’t read all the requirements and do your research. You may eliminate all of the other hard money lenders from your list and then discover that you cannot comply with all of the requirements of the lender with the low interest rate. And then what? Unfortunately you’d be out of options and you’d be out of time!

So make sure you do your research and list out every, single requirement that each hard money lender has.

The fourth factor is, Cash to Close Requirements.

Ask yourself, ‘what is the lender requiring you to bring in as your down payment, plus any closing costs?’

Know what your cash to close requirements are, because if your biggest need is the least amount of cash to close, you may want to choose the hard money lender with the lowest cash to close requirement. For example, if you’re tight on cash then choose a lender that only requires a 10% down payment at a 12% interest rate over another lender that has an interest rate of 10.5% with a down payment of 20%.

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The fifth factor is, Hard Money Lender Reviews.

Look at the lender’s reviews. Do they have reviews? Are they good or bad? If they have no reviews, no go! Some fake lenders out there, they have no reviews. If they have no reviews, are you really going to trust that they can fund your deal when it matters? Also, watch out for loan scams in hard money. If it sounds too good to be true, it probably is!

Also, if a lender has reviews, those reviews will tell you a lot of things about lender. If you do your research and actually read the reviews, you’ll find out if a lender can really close in 5 to 10 business days like they claim on their website. Maybe you’ll read the reviews and find out it actually takes the lender 21 days or more to close rather than the 5-10 days they’ve stated on their website.

So make sure you know what the reviews are for each of these lenders that you’re looking into.

The sixth factor to compare among hard money lenders is, Monthly Payments Required?

Does the lender require monthly payments? Most hard money lenders do require monthly payments. And if they don’t, usually there’s some other factor that offsets that, such as the requirement of a larger down payment, or a requirement for a really high credit score.

And then finally, the seventh factor is, the Total Cost of the Hard Money Loan.
What is the total cost of the loan for each hard money lender that you’re talking to? For example, every hard money lender has an interest rate, loan points, and then some hard money lenders have junk fees.

So not only do you want to look at the interest rate and the points when you’re comparing your hard money lenders, but determine all of the fees that are going to be charged to you at closing and after you close on the loan.

If you don’t know what the total costs are for each of the hard money lenders that you’re comparing in your matrix, you might choose a lender because they have lower points, only to find out that they have a $1,200 underwriting fee, a $500 document preparation fee, a $150 site inspection fee, etc. And if there’s a repair escrow, some hard money lenders may charge you for each draw you take out of that repair escrow. Make sure you know all of the costs!

Because each deal is so different, a hard money lender that is good for one deal may not be the right lender for another deal. A good example is a hard money lender that funds fast, versus a lender with a low interest rate that is slower to fund. You would not want to use the lower interest rate lender on a deal that needs to fund fast because he is too slow to fund.

Create your own lenders decision matrix, determine what factors are most important to you, and then rate each of your lenders on those factors. You do this by giving each lender a number 1 to 5 rating for each of the factors.

For example, for each factor (or column) of the matrix, number 1 is the lowest score and number 5 is the highest score.

For example a lender that funds fast the fastest would have a number 5 listed under the “Speed of Funding” column, while your slowest funding lender would have a number 1 listed under the “Speed of Funding” column. Rate each lender on each factor on a scale of 1 to 5.

Then you total out each of the lenders points for each factor. The lender with the highest score is the winner.

Try using your own decision matrix when comparing among your hard money lenders and you’ll see how easy it is! If you have any questions about how to do this, please leave them in the comment section below.

3 Common Hard Money Objectives Busted

As a hard money lender, I’ve heard a lot of objections  and myths over the years regarding why some people don’t want to use hard money loans. There are also misconceptions surrounding hard money lenders, more people don’t get right.  Get ready because I’m about to debunk the top 3 myths in hard money!

What are the most common objections about borrowing hard money that I hear?

The most common objection is, “hard money is too expensive!” But what really is your most expensive money? It’s not hard money, it’s your money. That’s right. Think about that for a minute. Your money is way more expensive than hard money. Don’t believe me? Check out this video we did on this topic called, “Why Hard Money is Your Cheapest Money.”

But back to my point, hard money is NOT your most expensive money out there. Although this is the most common objection  about borrowing hard money that I hear.

What is another common hard money objectives that I hear often?

Another common objection I often hear is, “I can’t qualify for a loan because I have bad credit,” or “I have a foreclosure, or a bankruptcy,” or, “I can’t document my income.”

The truth is, YES, you can qualify for a hard money loan if you have bad credit or can’t prove your income. Hard money loans are available to people with bad credit, foreclosures. and even past bankruptcies. Yes, that’s right. And most hard money lenders don’t have an income verification requirement for loan approval either. Wait until the end of this video and I’ll explain why hard money lenders will lend to you while others won’t.

What is another common objection that I hear about using hard money?

Many people who have never gotten a hard money loan before have a misconception that hard money lenders are all loan sharks and this means they’ll surely get taken advantage of. Wrong! Not all hard money lenders are loan sharks and unethical.

So how do you determine the good lenders from the bad? Read their reviews! If they have no reviews, then find someone else who has good reviews. Good reviews, that are clearly real, are a sign that you’re dealing with an ethical hard money lender that’s not a loan shark.  But be aware of fake reviews from hard money lenders that take upfront fees in advance of giving you a loan.

If you actually read the reviews, and read more than one, you can often tell if a lender’s reviews are fake.  A lender’s reviews are everything! And also make sure to check to see if the lender is licensed or accredited by the Better Business Bureau. If not, find someone else. Always work with licensed and accredited lenders!

And now I’m getting to the part you wanted to hear.

Why will a hard money lender lend to you if no one else will?

Hard money loans are not “hard” to get, as the name could suggest. Hard money loans are loans against “hard assets.” That’s why they are called hard money loans because hard money loans are asset based loans and not based on credit or income.

Hard money loans  are easier to get than traditional loans, not harder to get! So, if you’ve never gotten a hard money loan before, what are your objections?

Please share them in the comments below if you have your own objections. If you are open to using a hard money loan, reach out to us.

I’m Corey Dutton, I’m a private money lender and one of the best you’ll find out there. I’m also licensed, accredited, and I’ve got great reviews to back it up!

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