Beware of Hard Money Lenders With Bank Like Requirements
Avoid hard money lenders with bank-like requirements and bank-like sluggishness. When you want a hard money loan, you’re thinking speed, less hassle, and asset-based lending.
Many hard money lenders have strict requirements like banks, and move as slow as a tortoise!
Why pay the higher interest rates associated with hard money loans if your lender acts just like your banker?
Forget about it! If you are working with a lender like this, find another hard money lender!
Watch the video and see why
This is Corey Dutton, I’m a private money lender, and today I’m going to talk to you about hard money lenders that act like banks.
These are the type of hard money lenders that you just want to avoid! A hard money loan is called such because it’s an asset-based loan against a “hard asset,” and a hard asset is any asset that can be liquidated fairly quickly for cash.
So what I’m trying to tell you today, the lesson learned from this video is, look out for hard money lenders with requirements like a bank and tortoise-like slowness in closing your loan!
Requirements For A Hard Money Loan
The first thing you want to look at is their “list of requirements.” What are they? Are they a mile long, or are they really small, something that you can say, “this is great! This is kind of what I’m expecting” Beware of heavy documentation requirements.
The second red flag to look out for is a lender, a hard money lender, that’s looking for an appraisal. Now an appraisal isn’t necessarily a bad thing, but if you need to close your loan quickly, an appraisal could delay you by several weeks.
Find out how your Hard Money Lender is planning on valuing your property. Are they using an appraisal? And if they, are what is the cost and the turnaround time to get that appraisal back?
If you have to close next week, the likelihood of you fulfilling that requirement of getting that appraisal with the lender in time for your closing? Probably not going to happen.
The Lender Keeps Asking For More
And then the third thing that I want you to look out for is a lender that is scrutinizing every aspect of the loan, but really not paying attention too much to the asset.
A good example of this is a lender that just keeps coming back to you for one more documentation requirement after another.
Another example is a hard money lender that has unreasonable requirements. You know we talked about low documentation requirements, we talked about speed, we talked about something “hassle-free” something “asset-based,” right?
There’s a lot of hard money lenders out there that are online, that are fairly well-known, that you’re going to go to for a hard money loan and you’re going to find out that they are underwriting your loan exactly like a bank and their speed of funding is as slow as a banks’.
So what do you do when that happens? Find another hard money lender folks, don’t spend too much time, don’t waste too much time, with a hard money lender that’s not a true asset-based lender.
That’s the lesson learned here! Find a hard money lender that’s a true asset-based lender, that has low documentation requirements, that has a high speed of funding, and looks at the asset as the primary means of approving or denying your loan.
This is Corey Dutton, I’m a private money lender, and if you like this video please like it. If you have any questions, leave them in the comments section below.
7 Hard Money Tips That Will Keep You Out of Trouble
I’m Corey Dutton and I’m a private money lender. Today I’m going to give you some “Hard Money 101.”
This topic is about, 7 Ways to Get Yourself in Trouble With a Hard Money Loan.
Hard money loans can be great! They can make real estate investors a ton of money. But if you’re not using these loans properly, they can get you into a lot of trouble.
Let’s talk about 7 ways that hard money loans can get you into trouble:
#1: The lender not funding and losing your earnest money: This a huge way that you can get into trouble. You go to a lender and you’re depending on this hard money lender to fund your loan by your deadline or you’re going to lose your earnest money. The lender drags its feet, wastes a ton of time, and then declines your loan. If this is a purchase, this means that you’re going to lose your earnest money. That’s a huge risk. So make sure you’re aware of that when you engage a hard money lender on a purchase transaction that you need to close quickly.
#2: Paying Upfront Fees to a Hard Money Lender: Paying upfront fees such as appraisal fees, inspection fees, attorney fees, and then never getting a loan? That’s a really fast way to get yourself into trouble with a hard money loan, particularly if you’re going out to multiple lenders trying to get a loan and each one of them wants an upfront fee. And then not one of the lenders actually funds the loan? This is a huge risk to watch out for when looking for hard money loans.
#3: Getting Involved With a Predatory Lender: Let’s face it there are a lot of hard money lenders out there that just want to own your property. Their intent is that you will default on your loan, or that you will make some sort of mistake and fall behind on your payments, and then they’ll foreclose on your property. Their intent is that they’ll make all the profit on the property and not you!
There are a ton of private money lenders out there that are predatory. That’s one reason why you should be dealing with a professional or licensed private money lender if possible.
Do not mess with these random people out there who are not professional lenders that say to you, “Oh sure, I’ll lend you the money!” Because guess what? Those people are typically going to be the most predatory because they aren’t professional, legitimate private money lenders.
Let me give you 2 examples: I know a borrower that was doing a flip. She had a loan with a hard money lender for 90 days. He didn’t give her any copies of the loan documents at closing.
And according to the loan documents, if she didn’t pay that loan off within 90 days, on day 91 she got slapped with a $15,000 fee!! So guess what? That lender just goes out and buys himself a new car on day 91. And then he tried to foreclose on her property after it was all repaired and ready for resale. This is a prime example of predatory lending at its finest! Watch out.
Let me give you another example. I had another borrower that borrowed money from an unlicensed private money lender that was in her real estate club. This was just some random business associate that the borrower met via the local real estate investment club. This private lender gave the borrower a hard money loan on a handshake for a 90-day loan.
The 90 days go by and this private lender slaps this borrower with an extension fee of 2 points a month, or 2 percentage points of the loan amount per month. On this loan, it was $5,000 a month she was paying in extension fees! The lesson learned is to be sure to read the fine print in your loan documents and watch out for predatory lenders like this! If they are not professional lenders or licensed, stay away! Sometimes you think you’ll get a better deal by getting a loan from a private individual, “friend,” or a business associate, but you won’t.
#4: Not Having a Solid Exit Plan to Pay the Loan Off in a Short Period of Time: You’ve got to have multiple exit strategies on these loans because these are short-term loans with high-interest rates. Let’s say you don’t sell the property in the time that you think you’re going to sell it? Or, let’s say your exit strategy is to refinance the loan with another loan, and you can’t get approved for that loan?
Guess what? If you can’t pay the loan off in a short period of time you’re going to be paying an extremely high-interest rate for months, and months, and months. And eventually it’s going to catch up with you, eventually you’re going to fall behind on your payments, and eventually, that lender is going to foreclose on your property.
So make sure you have a solid exit plan and always know what you’re going to do if this happens, or that happens, in all different types of scenarios. Because you can’t just count on one exit strategy.
#5: Underestimating your Project Costs or Experiencing an Injury or Illness: Let’s say you’re doing all of the work on the property yourself and it’s a rehab. If you hurt your back for example, and you’re the one that’s doing the work, how will you finish the project within your budget?
I’ve seen it happen. One of my borrowers was doing all the work himself. He didn’t have a contractor, he was in there doing all the sweat equity himself. Guess what? He hurt his back. He couldn’t go back on that job, and he couldn’t afford to hire a contractor to finish it, otherwise, he would go over budget. So he got himself into trouble quick!
I’ve also seen borrowers that underestimated their project costs from the start of the project, which is a very common thing that new real estate investors are going to do. And that’s a really quick way to get yourself into trouble with a hard money lender, because if the hard money lender is giving you rehab money and they’ve given you a certain amount for your rehab, and then you go over budget.
Where are you going to get the rest of the money to finish the project? Are you going to be able to go out and get another loan from somebody else? Probably not.
#6: Market Collapse: If your plan is to buy a property and in 4 months, 6 months, after you fix it up and add a bunch of improvements you’re going to resell it. What happens if the market collapses in that time frame? That’s a huge way to get into trouble with a hard money lender because you are stuck paying on a high-interest rate loan. If you can’t sell the property for what you’ve got into it because the market collapses or someone lists a better house for less money on the same street? What will you do?
#7: Getting into Too Much Debt: This is called “over-leveraging” yourself. Leverage is debt. So if you’re over-leveraged, it means you have too much debt.
I’ve seen borrowers take out a first, second, and a third mortgage on a property to get it purchased and rehabbed. And then guess what? They’re paying the interest payments, interest payments are high, beginning to stack up, and then all of a sudden before they know it, they owe more money than the property is worth!!
With the interest and the fees you’ve paid to hard money lenders, there’s probably not going to be a lot of profit left there for you if you get into too much debt.
In conclusion, make sure you know what you’re getting yourself into when you take out a hard money loan. Please spread the word and share this video with someone that you know that may be out there looking for a hard money loan for the first time. Or someone that you know that maybe doesn’t understand all of these risks because it’s important to know what you’re getting yourself into with a hard money loan.
Like I said before, you can make a ton of money using hard money loans in real estate, but you can also get yourself into a lot of trouble if you don’t understand all of the risks.
If you have any questions or comments about this post or any of the risks I’ve discussed here, please leave your comments in the comments section below.
Hard Money Interest Rates Explained
Let’s say you’re getting a hard money loan and the lender quotes you an interest rate between 12 to 14 percent. Whoah! That sounds insane doesn’t it? That sounds insanely high when right now the average interest rate from a bank is 4 to 6 percent. We’re talking 12 to 14 percent folks. That’s double digit interest rates, right?
Now let me explain to you how hard many interest rates actually work. Most of the loans that you’re getting from a hard money lender are going to be very short term in nature. Somewhere between 1 to 12 months.
So let’s say you only have that loan for 4 months. You’re buying a property, you’re fixing it up, and some at some point in the future, 4-6 months down the road, you’re going to resell that property.
So let’s say you have this hard money loan for 4 months and the interest rate is 12 percent. How do you figure that out? That’s 4 percent not 12 percent, 4 percent. So how do you figure that out?
You take 12 percent. That’s your annualized interest rate and you divide it by 12 months, that’s going to give you 1 percent a month.
If you hold the loan for 4 months, that’s 1 percent a month, so that’s 4 percent, not 12 percent.
Hard money interest rates aren’t as high as they seem to be. Sophisticated real estate investors know how to use hard money lenders to make more money. To make more money in their investments by getting these loans paid off in 4 to 6 months. To walk away with an interest rate that’s actually 4 to 6 percent. That’s on par with what banks are charging.
If you have any further questions for us, leave them in the comment section below.
What Is a Hard Money Loan?
Why is it called a hard money loan?
A hard money loan is called such because for any loan you must have some form of collateral. In order to get that loan and in this case it’s called a hard money loan because you’re using a hard asset. Now what is a hard asset? It’s any asset like real estate that can be liquidated quickly for cash.
Why do you get one?
Hard money loans are commonly used by real estate investors to either purchase or refinance real estate.
What happens if you arrive at a loan closing and discover some additional fees charged by your hard money lender on the settlement statement? Hard money lenders may have some additional fees, but they may not be “hidden” after all. A lender’s fees may be right there in plain sight, you just need to know where to look. So how do you find out all of the fees so that you can better compare options among lenders?
(Disclaimer: Watch out for any fees paid prior to a loan closing. This could be an upfront fee scam).
What are the most common fees charged by hard money lenders? Every lender charges points, but points are not considered junk fees. Most hard money lenders disclose the points they charge, so points are typically not hidden fees either. It’s the “other fees” that a lender charges that may be junk fees.
For example, many lenders charge an underwriting fee, this is in addition to the points charged. Underwriting fees can be as high as $2,000, in addition to points paid to a lender. Other lenders may charge a legal fee or a document preparation fee at closing. These additional fees charged at closing can be anywhere from $500 to $1995.
And if you have a rehab loan with a repair funds escrow, there may be even more lender fees after a loan closes! For example, after a loan closing, a rehab lender will often charge a fee for each draw from a repair escrow for repairs to a property.
How do you find all of a lender’s junk fees before you go to the loan closing? Look at the fees listed on a lender’s website, check your emails back and forth with the lender, look closer at the term sheet or letter of intent given to you by the lender. Are the lender’s junk fees somewhere that you may have overlooked until arriving at the loan closing? When it doubt, ask! Ask a lender to give you a list of all fees that are in addition to the loan points. Clarify which fees are charged upfront before closing, which fees are charged at the closing, and if any fees are charged after closing.
Do the numbers and compare your loan options When comparing fees charged by different lenders, first make sure you know ALL of the fees that are charged by each lender. Total up all of the points and junk fees for each lender. Then compare your options side-by-side by using the fee totals for each lender. Which lender has the lowest, total fees?
Beware of upfront fee scams whereby lenders charge fees BEFORE a loan closing As discussed previously in the ‘disclaimer’ above, always be wary of paying any fees prior to the actual loan closing and funding. There are a ton of upfront fee scams pushed by fake lenders who have no intention of making loans. These scammers are just charging upfront fees with the promise of giving a loan. But how do you spot these scams and avoid them? Check out a video we did on this topic called, “5 Red Flags to Spot a Loan Scam.” Watch that video to avoid getting involved in an upfront fee scam.
Also, make sure you close the loan at a title company, and never wire your funds directly to a lender. The title company will provide you with a final settlement statement at the loan closing that lists all of the fees and amounts. But the moral of the story, make sure you know all of the fees a lender is charging before you get to the closing table!
Do you have questions or comments on this topic? Please leave them below.
Why Hard Money is Better Than Taking on A Partner To Make A Profit
Aren’t the interest rates on hard money loans just ridiculously high? Why would anyone borrow hard money funds rather than take on a partner?
Let’s compare the cost of a hard money loan with taking on a partner. Then you decide what’s a cheaper option.
The first question to ask yourself is, how much of your final profit will a partner take? 35%? 50%? 60%? Let’s say you find a partner that will take 50% of your final profit. You’re better off using a hard money loan rather than use that partner. Here’s why:
Hard Money Loan for $100,000: Hard money loan interest rate = 12% annually. On a $100,000 loan you pay loan fees of 3% or $3,000 when the loan closes. Then you pay 1% per month ($1,000 per month) until the house sells. Let’s say it takes you 4 months to fix up and resell a house. The total cost of the money for that 4-month time period is $7,000. ($3,000 in loan fees + $4,000 in interest payments). Let’s say your profit is $23,000 on this flip. After the cost of the hard money loan, you’re left with $16,000 in profit.
A Partner loans you $100,000 and takes 50% of your final profit: Let’s say your profit is $23,000 on this flip. After you give your partner 50% of that profit, you’re left with $11,500 in profit.
This is a difference of $4,500 over a 4-month time frame. Over 6 months it’s a difference of $2,500.
The double digit interest rates charged by hard money lenders may seem high on the surface. But when you compare it with the cost of taking on a partner, it suddenly becomes a better option, doesn’t it?
Get to know all of the hard money lenders that lend in your area on a first name basis, so when the right deals do come along, you can take them down and make a profit! Want to know how you can get started using hard money on your next deal? Reach out to us today and let’s get started!
What’s the difference between a hard money loan and bank loan?
Many people have this question, especially if they’ve never gotten a hard money loan before. So I’m going to tell you the biggest differences between a hard money loan and a bank loan.
What’s the biggest difference?
The speed. A Hard Money Loan is known for its fast approval and it’s fast funding timelines. The time from when you apply for the loan initially, until the time that it funds, is MUCH faster than a bank. Sometimes we can even fund in 24 hours!
Typically a bank loan is going to take you anywhere from 4 to 6 weeks to get closed, and sometimes longer depending on the transaction, especially if it’s a commercial property that’s underlying the loan.
What’s the second biggest difference between a hard money loan and a bank loan?
Your requirements needed for a hard money loan. The requirements for approval are far less than they are for bank loan.
A hard money loan is called that because it’s based on a hard asset. It is going to be the approval process for that loan is going to be based on the actual asset itself: e.g. the property characteristics and the value. A bank loan is based on the credit score of the borrower and the income of the borrower. Banks are going to look at the tax returns for the borrower’s income or they are going to look at the payment history on the credit report.
Hard money lenders typically don’t look at that credit reports or income. So it’s a totally different process with regard to how you get approved for the loan itself.
In summary, a hard money loan is a lot faster, from the time you apply until the time you’re funded. A hard money loan has far less requirements than a bank loan because it is based on the “asset”versus your income or your credit.
How to get a hard money loan in 24 hours
Every day someone approaches me and they wanna close a loan quickly sometimes in 24 hours. So how do you close a loan quickly in 24 hours or in say a week. Well I’m going to tell you what you need to close a loan quickly. So what do you need to close a hard money loan quickly?
1. The Purchase Contract If it’s a purchase you need a copy of the purchase contract. And that’s the entire purchase contract. Any addendums that have been signed together with that contract need to be provided to the lender as the full contract. So make sure you have a copy of the entire contract ready for the lender.
2. Preliminary Title Report Number two you’re going to need a title report a preliminary title report. The lender is going to want title insurance on their loan on this property. So you if you don’t have a preliminary title report ready to go. Make sure you have at least the title companies contact information that the lender will use to then offer that a preliminary title report to prepare for the closing. Number three, escrow, escrow contact information. In some states that title and escrow is the same company so in some states you don’t need to worry about this third item.
3. Title & Escrow This third, this third requirement to close your Hard Money Loan quickly. But in some states the title company and the escrow company are two separate entities. So make sure you have the contact information for the escrow company that will be handling the escrow part of your transaction and give that to the lender so that they can set up the closing and the funding with the escrow company as well.
4. Access To the Property Typically a lender is going to want to know what is the access to the property. Can I get in and do an inspection? Is there someone in there? and it’s not possible to access? I’m going to need to do a drive by? What is the access information? Is there a realtor that’s going to let me in? Are you going to let me in? Provide the access details, access information to the lender immediately as well so the lender can coordinate a site visit or a walk through to view that property.
5. Property Value What is the property value? That is going to be the lenders primary question in this whole approval process. If you have a comparative market analysis (CMA), give that to the lender. If you have a broker’s price opinion or if you have an appraisal that’s already been performed. give that to the lender immediately so the lender can satisfy the value question. Which is typically one of the biggest questions that a lender is going to have. What is the property value and how do we prove that.
6. Down Payment The last thing you are going to need to get your hard money loan closed quickly. Know what your cash to close requirements are going to be. Is the lender going to require some form of a down payment? Are you having to cover the loan fees or any other closing costs? If it’s an auction are there any auction fees any transaction fees that you’re going to be responsible for? So know what are your cash requirements going to be to close on this loan.Don’t be taken by surprise at the 11th hour when the lender tells you you need to bring in $12,852.63 and you have only $5,000 .
Hopefully this video has shed some light on the items that you’re going to need to close your Hard Money Loan quickly.
Can you get a hard money loan with bad credit?
You want to buy an investment property and you need to borrow money to buy it but you might have bad credit.
You’ve heard or read somewhere that hard money loans are the types of loans that real estate investors use to buy investment properties. But you worry that maybe you won’t be able to qualify for a loan to buy real estate because you’ve had some credit problems in your past.
The good news is that most private money lenders don’t consider your credit history when approving loans on investment properties.
Most lenders are looking at the real estate asset that will be used as collateral for the loan rather than looking at your credit score. This is why they are called hard money loans, because they are loans against “hard” assets like real estate.
However there are some hard money lenders that do consider your credit score in loan approval. As you seek out lenders that lend in your geographic areas and compare interest rates and fees, make sure to ask each of them how credit score influences their lending decisions.
If credit does weigh in as a factor for approval, the next question is, what is the minimum credit score requirement that they require? Some lenders will give a higher interest rate to borrowers with a low credit score, while other lenders may increase the down payment requirement of a borrower with a low credit score. Always ask the credit question upfront if you are unsure. You may also search in the lender’s website for specific requirements regarding credit.
So, can you get a hard money loan with bad credit to purchase an investment property? The answer is yes.
Of course you can. Foreclosures, bankruptcies, low credit scores, short sales.
No problem. And why? Why is a hard money lender going to lend to you if you have bad credit, whereas a bank won’t?
Well the answer is because a hard money lender is an asset based lender. This means that a hard money lender is lending on the real estate as collateral.
The Four C’s
Now a regular lender looks at the Four Cs. The four Cs when they’re determining whether to approve a loan or not approve a loan.
Credit is one of the four Cs. But what are the others?
Collateral, which is what we mentioned, the real estate, the property.
Character, the experience of the borrower or other characteristics about the borrower to weigh in into the lending decision.
And then finally, The Cash, how much cash do you have to bring into a purchase or if you already own the property, how much cash has been put into the property to date?
When you’re searching for hard money lenders and you’re comparing your options among lenders, make sure you know what the minimum credit score requirement is of that hard money lender because some hard money lenders yes they do, they have a minimum credit score requirement.
In fact, private money is one of the most popular means by which real estate investors with poor credit are able to purchase investment properties. While most hard money lenders don’t care about the credit scores of their borrowers, there are some lenders who do have credit score minimums or other credit-based criteria.
Do your homework on the specific requirements of each lender when comparing your loan options. If your credit score will affect your interest rate or will increase the amount of your down payment, you need to know!
By asking questions upfront about how credit score influences a lender’s lending decisions, you will avoid any surprises later down the road that may kill your real estate deal.
If you have more questions about this contact us or leave a comment below.
Two Types Of Insurance You Need For A Hard Money Loan
When purchasing an investment property and want your loan to close fast you will need two types of insurance, hazard insurance and title insurance. In the video below I explain.
So you’re getting a private money loan to purchase a property. You need two types of insurance. What are they? OK. Pretty simple, title insurance and hazard insurance.
What is title insurance? You’re going to need title insurance for yourself when you’re buying a property. But a lender is also going to want that. And that is going to insure the title against any kind of conflicts that may arise in the future on the title to that property. So that’s the first type of insurance you want when you’re getting a private money hard money loan.
Hazard Insurance The second type of insurance is going to be hazard insurance. You’ve put all of this money into this property. It’s your baby you’ve put your life savings into it maybe or someone else’s life savings make sure it’s insured. And that is not going to be the same as a homeowner’s insurance policy. OK that you’re getting on your home that you’re going to live in. That’s overkill for an investment property. All you need is a basic hazard insurance policy in place to get your private money loan.
OK. So let’s recap. Two types of insurance you need to get a private money loan, title insurance and hazard insurance.