How To Become A Hard Money Lender

How To Become A Hard Money Lender

Many people require loans to meet their financial needs. We all know the primary source of acquiring loans, i.e., from financial institutions such as banks and credit unions. Nowadays, it is quite easy to acquire a loan. However, the process is still time-taking. The borrower is only eligible to acquire a loan if he fulfills certain criteria. This includes details of creditworthiness, DTI (debt-to-income) ratio, financial or debt history, social security number, proof of the reason for requesting a loan, etc. What if the borrower does not meet these requirements? Or what if he does not possess enough time until the issuance of a traditional loan? The alternate and immediate solutions to this problem are provided by hard money lenders.

What Is Hard Money Lending?

Hard money lending is often heard when talking about real estate investment. This type of lending is secured by land or property. i.e., a hard asset; hence the name. It is often known as asset-based lending. Hard money lending is also called a bridge loan or short-term asset-backed bridge loan (STABBL). This is because a hard money loan is suitable for meeting immediate, short-term financial needs.  

Real estate investors or developers, property flippers, or renovators often need immediate funds to commit a deal. Traditional financing organizations, like banks and credit unions, do not promote hard money lending. Also, they issue loans after a lot of paperwork and have a prolonged approval procedure. Thus, the quick and easy resources in such a situation are individual financiers, companies, and private money lenders rather than banks. The hard money lending process is neither time-consuming nor requires approval procedures. It solely depends on the asset value over which the loan is demanded. And it has no concern with the financial stability of the borrower.

However, this can be quite risky. Private lenders require a down payment and extend hard money loans over a greater interest than other conventional financing organizations. Also, the loan term is shorter, within which the debtor must pay back. Hard money lending involves one-to-one correspondence between the borrower and the lender. This creates room for flexibility in terms and conditions decided between the debtor and lender.

Who Can Be a Hard Money Lender?

Hard money lenders can be big firms, private individuals, or groups of investors looking for short-term investments. They provide immediate loans for a short time over a high return rate. Borrowers often choose hard money lenders when they require quick finance for investment. Or when they fall short in the criteria of acquiring a loan from banks.

The hard money lender assesses the risk of the debtor. The higher the risk, the larger the amount of interest. The lender also inquires about the value of property or land used as security. Terms and conditions, including the amount of loan, payback time, and interest rate, are then decided between the two parties. The amount of loan depends on the LTV (loan-to-value) ratio. It is between 50% and 70% of the asset value. The loan period ranges between 1 and 3 years. Borrowers can pay back the lender’s amount either all at once or through small paybacks.

People or companies with excess and spare money from an investment point of view can be hard money lenders, especially those looking forward to multiplying their revenue in a smaller span and reusing it in the near future. Hard money lending can also be a better option for individuals holding a savings account because the interest rate is higher as a private lender. Individuals also make passive income through an indirect share in the real estate industry as a hard money lender. Retired people can be hard money lenders using their retirement savings account. This way, they can better upscale their savings.

What Are the Pros of Being a Hard Money Lender?

Borrowers, mainly real estate developers, investors, or flippers, need investors to support them with swift funds. In return, they are ready to pay higher interests than banks. The huge interest amount is one of the top prizes an individual enjoys being a hard money lender.

Real estate is one of the world’s biggest markets. Being a hard money lender is one way to become a part of this profitable industry besides making a worthwhile profit on investment.

Being a lender doesn’t cost you extra efforts besides scrutinizing the borrower. With multiple modes of payment, the lender receives the loan amount easily while sitting at home or, at most, goes out and collects the amount or check.

You may think that owning a savings account can earn you profit. However, being a hard money lender can provide over 6-15% more profit than a typical savings account. This depends on the interest rate a lender may charge.

As discussed above, hard money lending is also beneficial for individuals aiming for passive income.

Retired personnel can also expand the pension funds in their account by simply being hard money lenders.

Even if a borrower fails to repay the loan amount, the money lender can still get the investment. This is because of the asset over which the loan is demanded.

What Are the Cons of Being a Hard Money Lender?

The obvious and biggest drawback of being a hard money lender is the non-payment of the borrower. In cases when the borrower fails to return the loan amount, the lender’s amount is still protected due to the asset. The lender has the right to file a lawsuit against the borrower. However, the legal procedure can be bothersome. The recovery time is quite unpredictable.

Being a hard money lender calls for great attentiveness and cautiousness. A hard money lender must know the real estate and concerning investment strategies. The lender can minimize the risk with a thorough evaluation of the borrower, risk and default assessment of the borrower, and the property value.

How Do I Become a Hard Money Lender?

It may seem effortless to become a hard money lender. Getting started as a hard money lender requires a thoughtful mind. One must keep a sharp eye on the details. Here are some important checkpoints to analyze if you are the right person with complete knowledge to become a hard money lender:

  • Resource analysis
  •  Investment source
  •  Borrower and asset evaluation
  •  Establish terms and conditions
  •  Ensure proper documentation

Resource analysis

The first and foremost step is to determine the resource of the investment amount. This can be the idle amount lying in your savings account or any surplus revenue. It must be easily accessible and transferable. Make sure your account permits and is favorable for hard money lenders.

The next step is to estimate the right amount you are determined to lend at once. Offering your entire savings to lend might not be a mindful choice. Moreover, investing the entire amount in one place might be too risky. Minimize the risk by investing in various opportunities.

Investment source

After determining your resource capacity, look for the right lending opportunities. For this, you may seek help from a reliable investor through various investment associations. While dealing with an unfamiliar investor, make sure they abide by the regulations and possess the PPM (private placement memorandum) for private lenders. Contrarily, you can seek help from your friends or family associated with the real estate market. 

Borrower and asset evaluation

Once you are into hard money lending, it is important to gain knowledge regarding real estate investment strategies, though all the work is to be done by the investor. But this will help you in the long run. No matter how experienced the investor is, keeping a double check will reduce the risk. Play your part and conduct a detailed evaluation of the borrower and asset value. Carry out the background check of the borrower, either paid or on your own. This will make evident that the borrower is not a bankrupt person, a defaulter, or under trial for previous settlements. Do not invest until you are not completely assured.

Establish terms and conditions

After a satisfactory evaluation of the borrower, you can proceed with the lending. Terms and conditions are necessary for every agreement. The borrower and lender can negotiate and agree upon the loan terms. These terms may include the mode of payment and repayment, down payment, type of interest and interest rate, loan period, etc.

Ensure proper documentation

Many people overlook the documentation procedure. When finalizing an investment deal, no matter how unnecessary it may seem or how trustworthy your relation might be with the borrower, getting an official document must be a part of your routine as a money lender. This will not only protect the lender in case of a problem but also enable both the lender and borrower to abide by the rules. The original legal document must be kept by the hard money lender. A copy of the same documents is to be provided to the borrower. In case of nonpayment by the borrower, the lender can only take legal action upon presenting the original documents before the court of law.

Besides initial documentation, the track record of payback by the borrower must be practiced as well. Once the repayment has started, each payment, along with the amount and mode of payment, must be documented.

Final Notes

Becoming a hard money lender is worthwhile to upsize the savings and earn profit. It is another way to passively step into the real estate market. However, keeping up with the investment strategies and conducting the proper research before investment requires effort. A non-payment by the borrower can be risky. However, legal help can turn the events in favor of the lender. Ensuring the best hard money lending practices can lead you to profitability. Yet, risk estimation and management are crucial in hard money lending.

What is Amortization?

What is Amortization?

Amortization is the accounting process by which the value of a loan or an intangible asset sees its value recording lower as time passes. You often hear about depreciation in the finance world, but amortization sees a lot of confusion for anyone without an accounting degree. So what is the difference and why is amortization so important? Amortization focuses on assets or loans that exist on paper but are intangible. Here, we will dig deeper into the concept of amortization to help explain its use, purpose, and differences between other common financial tools. 

The Definition of Amortization

The term amortization serves two purposes in the accounting world. For that, there are two definitions you need to understand in total. All-in, amortization will do the same thing across both platforms, but the way it works differs slightly.

The first scenario where amortization comes into play is with the intangible asset factor. If you have capital expenses you pay over time towards an intangible asset, the asset will have a useful life put to it. The most common example of an intangible asset is something like a website or a piece of software. As a company, you pay capital to create it, but in the end, you cannot physically hold it. The capital you pay becomes the total you amortize or spread out amortization of, over the useful life of the asset.

The second scenario for amortization has to do with loans. When you have a loan and you are paying off debt with principal and interest payments, the amortization schedule will show the reduction of the balance. A car loan or a home loan are two of the most common examples of when you would get a formal amortization schedule. As you pay your car loan, a portion goes to the principal and the rest interest. The schedule shows the reduction of the loan over time.

How Amortization Works

Amortization is all about calculating value over time. In the situation of amortization expense, as it relates to intangible assets, it starts with the useful life of an asset. As you build a piece of software, you are sending on development costs, training, testing, and more. All this needs tracking so it can see added to the overall cost of the intangible asset. You total it and capitalize the intangible asset on your balance sheet when substantial testing is complete to the point where the software is ready for use. From there, you determine the useful life of the software, usually on a straight-line basis. For software, this is typically 15-years. 

So now say on January 1 you put a $150,000 piece of software into production and add it to your balance sheet. On January 1 of the following year, one year of useful life is gone. You recognize that as a $10,000 amortization expense on your profit and loss for the year, and the value of the intangible asset drops to $140,000 accordingly. This keeps happening until the asset has a value of $0.

Amortization calculations for loans work a bit differently, but with the same concept. Amortization for a loan begins with the outstanding loan balance each month. When a loan first starts, a monthly payment calculation takes place. The interest rate sees calculation against the outstanding loan balance, divided by 12 months. The principal is the amount due, the total for the month, minus that interest payment, and does not change over time.

As the months and years go by, the outstanding loan balance changes as the principal cost brings the balance down. The payment you make does not change, but what happens is the amount of principal you pay over time goes up, while the interest goes down. This is because the interest payment sees calculation over the most recent balance. This is why your mortgage payment will not change, but the principal you pay to the loan continues to increase monthly.

Types of Amortizing Loans

The most common type of amortizing loan is that of an installment loan. Installment loans are loans you pay periodically, usually monthly, until the balance of the loan gets to $0. The common installment loans out there include home equity loans, auto loans, and mortgages or home loans. 

Benefits and Drawbacks of Amortization

There are a lot of benefits and drawbacks when it comes to amortization. On the benefits side of the house, whether you are a business with an intangible asset or taking out an installment loan, it gives you the ability to recognize and pay properly over time. Without amortization, interest may not calculate accurately over the life of a loan. The ease of that simple monthly payment is made possible due to the amortization schedule and amortization concepts in place. With intangible assets, it allows you to recognize the true value of the asset on your balance sheet and expense what you in theory put to use in that year.

The disadvantage of amortization is minimal. You may want to try and lower your monthly payment over time, but with amortization, you cannot as the payment remains fixed while the interest and principal change. For a business, amortization does not allow you to expense the entire cost of building a piece of software or similar asset in the year it is put in use (unless you do a special tax election), thus the expense may drag over time.

What Assets Are Amortized?

The most common types of assets you see amortized include:

  • Software
  • Lease Rental
  • Patents
  • Trademarks

What is the Difference Between Depreciation and Amortization?

Depreciation and amortization are similar in their application. The big difference is that depreciation deals with a tangible asset, such as a house or a car, while amortization deals with an intangible asset, such as the software the company built to install in all their cars. 

What is the Difference Between Capitalization and Amortization?

Capitalization is the amount you recognize as the value of the asset. In short, capitalization is the start of the process to amortize, so they work together but are very different. When you finish filing a trademark, all the costs that went into that go into the capitalized amount. The amortization period begins from the start of that useful life point.

Frequently Asked Questions on Amortization

What Does an Amortization Schedule Look Like?

A common amortization schedule will look just like a chart where you have one row along the top with headers, with the data underneath. The schedule or chart will show how your payment sees distribution over time. You will see the month, the payment, the balance, and how much principal as well as interest you pay monthly with that basis in mind.

What is Reverse Amortization and Could It Help?

Reverse amortization works differently than standard amortization. As the name implies, it works in the opposite direction. Say you are buying a home and you want to start with a low payment, the reverse amortization process works where you pay the smaller amount of interest out of the gate, thus your payment is lower. As time goes by, your payment goes up. This works for many individuals as, in theory, income will increase over time. 

Final Notes

Amortization is unique in its application but can provide a lot of benefits to individuals and businesses. Whether you are applying amortization to intangible assets or to an installment loan, understanding how it works can provide you with financial understanding and the positives it brings with it.  Source Capital is your resource to help you meet your capital needs to make that next big financial move!  

What is a Short-Term Loan?

Short-term loans can be a quick way to gain funding that you might need immediately. They are often for lower amounts, and are typically due not long after they have been taken out. Short-term loans might include options like payday loans, car title loans, and bank overdrafts. While short-term loans can be a convenient option in some cases, it’s important to know that there are also significant financial risks associated with them. 

Read on to explore the various kinds of short-term loans, their uses, and what the advantages and disadvantages of this form of funding are. 

What is a short-term loan? We’ll start with a short-term loan definition. 

Short-Term Loan Definition

A short-term loan is just a loan with a quick repayment period—usually less than a year. Short-term personal loans are one common form of short-term loan, and are usually used when a borrower needs cash immediately and plans on being able to repay the loan soon after taking it out. Short-term business loans are also available for businesses that need a quick starting boost to get them up and running.

Short-term personal loans may have lower credit requirements than other forms of loan, requiring collateral instead—or they may have very high interest rates as a means of securing funding. 

How Short-Term Loans Work

Short-term personal loans work by providing borrowers with cash quickly and efficiently. Rather than the rigorous credit checking and other background requirements often necessary to secure a long-term personal loan, short-term loans use information like your income or require collateral to secure your eligibility for a loan. 

When you take out a short-term loan, you’ll give the lender basic information, like your name, occupation, and the amount that you intend to borrow. If you’re approved, you will likely receive the funds you requested within 24 hours. 

Typical terms and characteristics of short-term loans

Short-term loans are so named because they must be repaid in a short period of time, usually within six months to a year in most situations. Any loan with a period longer than that is referred to as a medium- or long-term loan. Medium-to-long-term loans can have a term lasting from just a few months to 25 years. 

Some short-term loans don’t have a set payment plan or a deadline. They just permit the borrower to repay the debt at his or her own speed. Ultimately, the exact way that short-term loans work depends highly on the lender. Some lenders may have more flexible and accommodating terms. Others might be very strict and have punishing interest rates and penalties for borrowers who don’t conform to the exact terms of the loan. (Find out more in the benefits and drawbacks section below.)

Types of short-term loans

What is considered a short-term loan? There are a few different kinds of short-term loans to be aware of as you begin your search: 

  • Payday loans: This is one of the more common forms of short-term loan. Payday loans are quick and easy to obtain, but often have very high interest rates. They’re called payday loans because borrowers may effectively promise a portion of their paycheck to the lender in exchange for cash right then and there. 
  • Car title loans: For borrowers who own their car outright (i.e. don’t owe money on an auto loan for the car), car title loans can be an enticing option. Borrowers use their car as collateral, meaning that if the borrower is unable to repay the loan, the lending agency will possess the car to recoup losses. 
  • Bank overdraft: Banks charge overdraft fees when an account holder withdraws a greater amount from an account than they actually own. These can be used as a form of short-term loan, but it’s important to know that banks can charge punishing overdraft fees. 
  • Bridge loans: Bridge loans are used to secure financing for a brief period until long-term financing is secured. For example, consumers might use a bridge loan to secure a deal on property before they have secured their mortgage, or a business might use one to purchase an asset before acquiring a long-term business loan. 
  • Lines of credit: Lines of credit, such as a credit card, can be considered short-term loans. This is because they require repayment usually within a month of using the credit. 
  • Merchant cash advance: Merchants may opt for this form of loan to cover assets quickly. Lenders provide merchants with cash, then take a portion of the merchant’s profits until the loan is fully repaid.

Qualifying For a Short-Term Loan

One of the benefits of short-term loans is that they often have less strict borrowing requirements than other forms of medium- or long-term financing. For example, you might not need to have a high credit score in order to secure a short-term loan, which is often a requirement for a traditional personal loan, or even a credit card. 

The exact qualification requirements for a short-term loan will depend heavily on the individual lender. Common requirements include proof of income (especially for payday loans), collateral, or consent to a high interest rate. 

Benefits and Drawbacks of Short-Term Loans

Short-term loans have some significant benefits for people who need cash quickly. However, it’s important to know that they have significant drawbacks. Before you rush to your local payday lender, carefully consider the benefits and drawbacks of short-term loans listed below. 

Benefits

  • Fast cash: The main benefit of this form of financing is that it’s quick, often getting funds into your account within a single day. 
  • No collateral needed: Depending on the type of loan you apply for, you may not need collateral. Payday loans, for example, do not require collateral. Car title loans, on the other hand, do. 
  • Bad credit may be accepted, depending on the lender: Unlike personal loans, there are usually much more lax credit requirements for personal loans. 
  • Not committed long-term: They’re short-term, which can be convenient if you know you can pay it off quickly. 
  • Some short-term lenders offer payment plan flexibility: Some lenders can be flexible about terms and conditions. 

Drawbacks

  • High interest rates: One of the biggest drawbacks of short-term loans is that they can have significantly higher interest rates than personal loans, often over 50% or even 400% interest rates depending on the lender. 
  • High fees: In addition to crippling interest rates, short-term loans can have sky-high fees, making the overall cost of the loan extremely high. 
  • Not a good solution for long-term financing: As the name would suggest, short-term loans do not work well for long-term financing solutions. 
  • Predatory industry: The payday loan industry is notoriously predatory, taking advantage of people who might not fully understand what they are agreeing to, and siphoning money away from some of the lowest-income and most financially desperate communities in the country. 
  • Aggressive collection tactics: For those who are late on payments or unable to pay, they may receive persistent calls and even visits by people attempting to collect their debt. This can also lead to punishing fees and interest rates. 

Short-Term Loans: Frequently Asked Questions

What is a short-term loan good for? Check out our FAQs to find out. 

What is an example of a short-term loan?

Payday loans are a common example of a short-term loan. In this form of financing, a borrower secures funding from a lender by promising to use their next paycheck to pay off the balance of the loan, usually at a high interest rate. Though they are called payday loans for this reason, they may or may not be directly tied to a paycheck.

Are short-term loans good? 

Short-term loans may be a solution in some cases, such as needing to cover rent for fear of eviction, or in rare cases of medical emergencies. However, in many cases, short-term loans can be financially risky for the borrower. 

Where can I apply for a short-term loan?

Lending agencies often have online applications that you can fill out and receive funding quickly and securely. You may also receive a short-term loan through a payday loan shop, by using a large amount of a line of credit (such as on your credit card) or by overdrafting your bank account. 

Final Notes

Short-term loans can be a useful financing option in some rare cases. Short-term loans are effective for covering emergency expenses, or for helping your small business cover initial startup costs before the funding from a long-term financing source has kicked in. 

For all your funding needs, there’s Source Capital. Source Capital is a trusted lender with years of experience supplying funding for everything from personal loans to hard money loans to purchase and flip homes. The next time you need funding, work with our experts to get the money that you need on a timeline that works for your personal or business interests. 

What is a Hard Money Loan, and How Does it Work?

Not everyone can qualify for a traditional loan. Banks and credit unions look to verify a recipient via a background and credit check. Once this has been processed, they will then evaluate the loan request, recipient, and decide whether they are worthy. In other words, banks and credit unions look for someone trustworthy to lend their money to and this trustworthiness is mutually exclusive to creditworthiness.

Unfortunately, due to a host of reasons, bad credit or other circumstances can render someone unfit—in the eyes of these institutions—for a mortgage, loan, credit card, etc. Thus, they must look elsewhere.

On the flipside, there are investors, developers, and house-flippers that simply don’t like the traditional loan process. To them it is an arduous, complicated, and often-times rigged endeavor that leaves them owing a trust-fund worth of interest and with their credit maxed out.

Thus, what do these people do when they either can’t apply for a traditional loan or don’t want to?

Enter the hard money loan (HML).

What is a Hard Money Loan?

A hard money loan is (typically) a sum of money lent to an individual or business by a third-party investor(s). Rather than backing the loan via use of the recipient’s credit, the loan leans against physical assets. For example, rather than checking the individual’s credit score, the lender will grant the loan against the value of their home. Although real estate is the most common backing of hard money loans, other physical assets have been known to work as well.

When discussing borrowing hard money, it is important to note that they are typically issued to property developers While hard money loans certainly exist elsewhere, and are processed for a variety reasons, they are most commonly tied to real estate and flipping houses.

Some of the common types of HMLs go as follows:

Construction

This hard money loan allows a real estate developer to move on their green-lit project.

Bridge Loan

Bridge loans allow someone to snatch up a property quickly. These borrowers usually have the intention of selling or refinancing the home. Additionally, a bridge loan can allow someone to purchase a new property before they are able to cash out on their anchor home. In simpler words: a bridge loans allows the borrower to pay for a down payment although they do not have funds yet. This type of loan can also be issued to someone that does not qualify for a mortgage.

Fix-And-Flip

This type of hard money loan provides a borrower with the resources to purchase a property quickly, rehabilitate it, and then sell it. This sale will cover the cost of the property, loan, and provide additional profit.

Owner-Occupied Loan

Outside of the realm of real estate, this loan is tailored towards the borrower that does not qualify for a traditional loan. They will need to borrow against a physical asset, such as a property they own. Owner-occupied loans are almost always lent to homeowners.

Case-By-Case

Alternatively, private investors or firms will provide hard money loans on a case-by-case basis, which means the borrower may have the intention of using the money outside of real estate and may back the loan via different physical assets, such as a car.

How Does a Hard Money Loan Work?

Hard money loans have a bad reputation. We will delve further into this stigma later but generally, people think of HMLs as money handouts from the neighborhood mob that comes with, well, a serious price. If you fail to pay, they own you. Might even break your legs if you’re unlucky.

In the financial world, this notion is laughable. Hard money loans are simply an alternative method, one executed outside of traditional methods, that can provide investors, individuals, and real estate developers with capital.

The typical way a hard money loan works is as follows:

Assessment

First, an individual or business will desire a hard money loan. This can be a result of their inability to obtain a traditional loan or simply their preference. They contact a hard money lender, explain their situation and amount coveted. The hard money lender will then evaluate their assets and investment opportunity and, if they deem the individual or business eligible, set a lending value based on the total value (always less) of the assets owned or to-be-purchased.

Fees & Interest

Upon settling on a price, the hard money lender will then apply fees and set an interest rate. As a rule of thumb, interest and fees will always be higher when it comes to a hard money loan. The risk does not come without reward—as we will explain later. Generally, the break down goes as follows:

  • 2-5% processing fee, often required upfront before the loan is issued
  • 12-21% annual interest

Say, for instance, you have been approved to take out a $100,000 hard money loan. In the best-case scenario of our above estimates, you will have to pay $2000 before receiving the loan and will accumulate $12,000 in interest per year. These numbers are relatively standard across the industry, but they do vary dependent on the value of assets, case, and lender.

Timeframe

Although hard money loans vary, the most typical must be paid within 6-12 months. These loans are processed quickly and their greatest advantage is their processing speed. At a cursory glance, the above processing fees and interest would not be worth it if not for how quickly these loans are issued.

Granted, not every borrower’s circumstance is the same, and hard money loans can range from 6 months to five years. Usually this is not the case.

Processing Time

A hard money loan can take anywhere from three days to a month to process. The average time, however, is one week. Therefore, borrowers who have come across an expiring but potentially lucrative real estate opportunity prefer hard money loans; while they may have higher fees and interest, dealing with less paperwork and downtime means they can seize the opportunity before them.

Hard Money Loans and Property Acquisition

While the aforementioned process is an oversimplification of the hard money loan, it does serve as a viable overview. Most hard money loans will follow those exact steps, regardless of the borrower or circumstance. But we should take a look at the most common reason for hard money loans; flipping properties.

How Do I Prepare?

If you are currently interested in obtaining a hard money loan in order to acquire a property, then you will need the following items before contacting them:

  • Address
  • The Purchase Price
  • Exit Strategy
  • Costs of Construction
  • ARV (After Repair Value)
  • Scope of Work

These are the base items you are going to need. If you stroll into a third-party lender’s office and say, ‘I want x loan because I want to buy a house’ they are nearly always going to want to vet the property you are referring to. You need to have the items handy—even if just for credibility purposes. They are going to take a borrower more seriously when they waltz in meaning business.

In addition to the above items, and to speed up the process, you will also want to include the below. Remember, this not a bank or financial institution; they are going to want to mitigate any risks by analyzing your investment history and other comparable properties.

  • A Breakdown of all Construction Costs
  • Property Feature Analysis
  • Comparable Properties That Support ARV (provide addresses)
  • ARV Breakdown
  • Potential Profit Margins
  • Evidence of Experience
  • Credit History Access

How the Lender Regards Your Flip-It Request

Take an Arizona hard money lender, for instance. They will estimate the size of a given loan dependent on a percentage of the property’s After Repair Value, an appraiser’s (usually independent) ARV, in-house ARV, a percentage of the given purchase price, percentage of the as-it-stands value, percentage of total coasts, or a combination of multiple of these eliminates.

With that being said and as we have stated before, each hard money lender is going to have a different process and this will vary both by the case in question and the third-party which lends the money. We can, however, make a few overt generalizations.

For residential flip-it requests, usually a hard money lender is going to size a loan to about 80%~ of the purchase price or 60-70%~ of the after repair value. In which case, here’s a breakdown:

ARV Breakdown

You are looking to buy a home that, for sake of an easy example, costs $100,000. The repairs and renovations are going to cost you around $50,000 and you expect to sell the home for around $200,000~ after all is said and done. If you had the money, then your profit would be somewhere in the realm of $50,000~ .

In which case you are probably going to see a hard money loan quote come in around $140,000~. This price is a combination of the above elements and, will still require some initial capital to sustain (by use of the example, you will need another $10k for the renovations and you will still have to pay for the loan fees and interest).

In addition to the total amount, some lenders may reserve a portion of the loan. This is commonly known as a ‘holdback’ and it is used for future advances. Often, it is given incrementally at certain milestones per se (like different stages of the home’s rehab) and can be used to pull equity out of the property before the sale is finalized. However, this holdback amount is not exempt from interest or fees. A hard money loan typically charges interest on the total amount issued (HML + holdback) from the date the funds are transferred.

How Can I Use a Hard Money Loan?

Saying that you can use a hard money loan in any which way isn’t necessarily true. While their applications can, theoretically, be endless, usually the way in which you are going to use the loan is dependent on the contract signed between you and the lender. For instance, if you are taking out a loan to buy a house as agreed upon by you and the lender, then blowing all the money on vacation will (most times) negate your contract.

With that being said, there are a few key reasons people take out hard money loans rather than traditional ones—even those that qualify for both.

The House-Flipper

Developers often prefer hard money loans because they can borrow larger amounts, back them with physical assets (which they own), and the processing time is much quicker. The reliability and efficiency of the hard money loan process is enough to justify the higher interest and fees. This is particularly true when an opportunity with a short expiration date surfaces.

The Non-qualifier

Those who own tangible assets but have bad credit may not be able to qualify for a traditional bank loan. They can spend all their time proving income, net-worth, and providing proof of their assets, but if they have bad credit (most times) the bank will not deem them eligible. Thus, they turn to a third-party lender looking for a hard money loan. The alternative process then grants them eligibility because the loan is backed by that which they own and their credit has no role in it.

The Distressed

This dynamic is often what gives hard money loans their infamous reputation—the financially distressed. At times, a borrower that has a loan in default they need to refinance will come to a hard money lender as a last-ditch effort to rectify the situation. Unscrupulous lenders can, in these instances, draft shady and ruthless hard money loan contracts that the distressed borrower is forced to sign—due solely to their own difficult circumstances.

However, in ethical and more common cases, if the borrower knows they are going to come into a sum of money but, due to current circumstances, cannot stay afloat, a hard money loan can be the perfect bridge to guide them over their troubles.

Quick Profits

The overarching theme of a hard money loan is this: the borrower has a way of generating substantial profits quickly and these profits, in their finality, will still hold their value even after fees and interest accrue on the HML. They do not have the money upfront to fund the quick-profit project themselves and, due to the difficult and time-consuming bank loan process, turn to hard money lenders instead.

What Are the Hard Money Loan Requirements?

You may find yourself reading through this article and thinking, ‘okay, I understand, but how do I qualify for a hard money loan?’ While HMLs are certainly more lenient in their eligibility-process that does not mean that everyone will pass muster.

The primary factor hard money lenders look at when issuing a loan is the total profitability of the deal in which a borrower is bringing to the table. Banks, on the other hand, focus on the property as collateral and the borrower’s creditworthiness. Thus, while a hard money loan will still vet the borrower (yes, this can include a credit check) the importance is not necessarily on them, but on the project. Remember, most HMLs are issued to developers looking to flip a home, meaning most hard money lenders are well-versed in real estate and have their own analytical teams that will consider a given project and say yes or no.

The reason in which we stress this point is because, well, there are no objective requirements ubiquitous across the third-party lending industry. Each potential project is going to have its own gamut of circumstances and these, for better or for worse, are what will constitute whether or not you meet a hard money lender’s requirements. The industry is so diverse that certain hard money lenders will approve a given project while others will not.

The rule of thumb is there are three types of projects (all involving real estate) that appeal to the hard money lender.

  • Fix and Flip
  • Cash-out and Refinance
  • Construction

Commercial Hard Money Loans

The process of obtaining a commercial hard money lending is typically no different than an individual. With that being said, having company backing for a larger project, commercial real estate being the focus here, can greatly benefit the validity of the borrower. Hard money lenders will have an easier time approving a given project if the company, especially if it is held in high esteem, is liable.

This greater liability paired with commercial projects will, after the aforementioned components are verified, result in a much larger loan than an individual.

Where Do I Get A Hard Money Loan?

You can receive a hard money loan form a third-party hard money lender. Being that borrowers are continuously put-off by the traditional banking system, there are now more hard money lenders than ever. Still, seeking a hard money lender in hopes of finding the one with the lowest interest and fees is not necessarily the route to the most trustworthy, dexterous, or even ethical lender.

How Do I Find a Good Hard Money Lender?

Unfortunately, anyone with lending capital can consider themselves a hard money lender. The check sizes can range anywhere from a few thousand dollars to the millions. Thus, when it comes to finding a good hard money lender, the people are arguably more important than the deal. The goal here is to find a trustworthy establishment that upholds great values, a fantastic reputation, and their standard of work.

As with anything in the financial world, due diligence is key. Make sure to do you research and ensure that the hard money lender you are considering has a good track record. While hard money loans are certainly stigmatized, that is not to say the world is without unscrupulous and shady lenders. Here are some important questions to ask when you are looking to find a good hard money lender.

  • Is the lender you are seeking an actual lender, or are they an extension of another?
  • What is the source of their capital?
  • How many loans have they processed in the last year?
  • Credit scores, are they important? (often, lenders that don’t so much as bother with credit can be indicative of shadiness)
  • How quickly do they process loans?
  • After your loan is funded, is it sold or do they keep it in-house?
  • Does the lender service the loan, or is it a third-party?
  • What kind of documentation is involved? Are they reliant upon third-party appraisers?
  • Is there an extension option on the loan in the case that your project goes on for longer than expected? If so, what sort of penalties or fees will accrue?
  • If a quote is provided, is that real to the terms? Or will they do an ‘overhaul’ before you sign?
  • The lender—are they well-versed in real estate? As in, do they flip homes themselves, or are they simply lenders?
  • Has the lender ever foreclosed on a loan?
  • Will they willingly provide references for borrowers they’ve worked with in the past?

These questions work as a fantastic starting point for at least peeling away the initial layers. The more answers you can obtain, the better your chances at understanding who your lender really is. Lastly, remember that these are not traditional institutions—meaning they are less regulated. The hard money loan business is typically relationship-based. Those that do well have long track records and varying clients. Those that want your money will promise the moon and eagerly await you to sign away.

Conclusion

A hard money loan can be a fantastic way to avoid traditional financial institutions and cash out on a quick loan—one that will help an investor seize an opportunity soon-to-expire. Despite their stigmatization, they are simply an alternate loan that comes with a different set of parameters. For developers, investors, and those who have the assets to support the loan but a bad credit score (often due to divorce), they can be a godsend.

 

Where to Find Best Hard Money Lenders?

Need help with cash? Try Source Capital, a trusted name in hard money lending. Started in 2006, Source Capital provides hard money loans on the basis of equity in property in the United States. The cash loans are secured without much nibbling into the borrowers past and it is extremely fast. Processing a loan within 7 days is our forte. Source Capital is your friend if you seek personal loans. The funding is done directly as we understand your needs in personal situations.

Hard-Money-Loans

Source Capital provides direct hard money loans in California, Arizona, Oregon and Minnesota. We are a one stop solution for hard money loans. Hundreds of borrowers in Arizona, brokers in California and investors in Oregon and Minnesota have been able to generate funds and hard money loans from Source Capital. The licensed hard money lending process is extremely private and you are funding according to the real worth of your estate.

The presence of Source Capital in different states is a result of commitment towards its clientele. Source Capital is one of the highly reputed hard money lenders in Arizona, where so many quick hard money loans have been processed. More than $650M has been funded throughout Arizona and more loans are being processed every day. Many mortgage broker trust the brand for financing help. Get hard money loans funded in and around Arizona, Phoenix and even areas like Tempe, Peoria, Chandler, and Scottsdale etc.

Coming to the golden state, California hard money lending is quite useful. Source Capital is head quartered in San Diego and its direct money lending has helped so many borrowers. California hard money loans have been processed since 2006 by Source Capital and the clientele has grown significantly.

On a personal note, a partner of Source Capital comes from the land of 10,000 lakes. Many borrowers and real estate professionals secure hard money loans in Minnesota from Source Capital. The love for the state is quite clear as a record funding of more than $100M is already done in the state.

Need hard money lenders in Oregon, Source Capital is there too. Yes, the beaver state is also the real estate market that Source Capital has been financing. All around the state faster processing of loans is possible because real estate hard money loans are given by Source Capital.

Source Capital Direct Premier Hard Money Lender

Source Capital is a specialist in providing residential and commercial real estate hard money loans in the California and Arizona. We approach financing with private capital that allows speedy and flexible processing more than banks. You can secure loans by signing of deeds of trust on real estate. The management team has a legal counsel with decades of real estate experience, all of which helps people to rely on the experience and knowledge of Source Capital. In case of any assistance or query, please call us today at 888.334.6636.

Source Capital has a strong commitment to their clients, to business ethics, post-funding management and underwriting. Source Capital offers loans to various property types, both for residential (Single family, Multi-Family, Owner-Occupied) and commercial (Office, Retail, Industrial, Mixed-Use, Apartments) use.

Below is a list of Source Capital’s General Terms and Conditions:

  • Loan Amount is between $20,000 and $2,000,000
  • Interest Rate from 8.99% to 11.99%
  • For a period of 6 Months to 7 Years
  • Points: 2.5 – 4
  • Loan to Value: Up to 70%
  • Amortization: Interest Only
  • Collateral: Real Estate
  • No Prepayment Penalty
  • There are no upfront and junk fees

Source capital has standing work relationships with brokers, borrowers and investors and make sure that there is a secure transaction in a timely fashion. We have created a solid reputation for themselves by offering hard loans for real estate and are helping numerous borrowers, brokers and investors realize their business goals in a short period.

Source Capital is a direct and licensed lender, and hence borrowers can have the assurance that no loan paperwork will see the outside of the office. There is no need for external approvals or underwriting decision-making. With Source Capital’s immediate access to hard capital, there are fewer worries and snags.

Source Capital has its own funds, and hence, it specializes in private real estate funding for brokers fast and offers creative solutions to accommodate all client needs. We value our broker relationships and help close your transactions fairly and in time. After researching the property’s real worth, they approach funding in way so that they can structure the loans to fit the client’s finances.

Source Capital offers only first trust deed loans while giving the investors a great opportunity to get high yield returns, with minimum risk. The transaction is secured and offers the investors monthly returns. Each investor is recorded in a first trust deed position, with more security added in the form of a promissory note and personal guarantee. After funding is approved, the investors are given a loan-funding package consisting of documents involving all aspects of the loan. Source Capital tackles all due diligence process to take care of all the parameters and to manage the loan until term.

Source Capital protects the privacy of all its clients, and keeps all your information secure. As San Diego’s direct premier hard money lender, Source Capital boasts of firm business principles that have made their business relationships an overall success.

How to Get a Real Estate Loan With Bad Credit

There are many reasons for bad credit scores like financial problems or if you have recently started to build up your credit, whatever the reason, bad credit makes it difficult to acquire a loan from banks. But you can get the loan you want, even with bad credit, from good and trustworthy hard money lenders like Source Capital. We offer hard money loans for residential as well as commercial real estates. For more info, please contact us now via email or call us at 858.705.6144.

 

For a residential or commercial hard money loan, the underwriting decisions are mainly focused on the borrower’s hard assets, and not on his credit scores. In these cases, the real estate investment is used as collateral for the transaction. Hard money lenders are able to close the deals quickly, even in less than a week, as their funds mostly originate from private investors. Source Capital is a well known and well recognized residential and commercial hard money lender offering hard money loans in California, Arizona, Minnesota, San Diego, Phoenix, Los Angeles & more.

A commercial or residential hard money loan is a good alternative to traditional bank financing when you have bad credit. Hard money loans are beneficial to the borrower as well as the investor.

Source Capital lends hard money to people with bad credit, which can be a result of any number of circumstances. You can also apply for hard money loans from Source Capital when:

  • You have impaired credit and even with past bankruptcies
  • You have tax liens, judgments or unpaid items
  • For property repositioning
  • You need funds quickly to buy a residential or commercial property
  • You need a quick closing
  • To avoid foreclosure
  • You need a stated loan due to the presence or lack of tax returns
  • You need a “bridge” loan
  • You do not qualify for bank loans for some reason
  • You want to restructure you debt
  • You are a foreign national
  • You need a loan without the need to submit all your documents like in a bank
  • You need a personalized loan offering creative solutions for your financial situation

Source Capital will be able to secure and offer hard money loan in all these circumstance because bad credit does not matter much to us. Our decisions are almost solely based on the value of the real estate you are planning to buy. With Source Capital, you need not pay any upfront fees or prepayment penalties. Our terms and conditions are beneficial to both parties and can be customized to suit your finances.

 

How to Find Hard Money Lenders in California?

In order to find suitable hard money lenders in California, you need to identify your needs. The money lender should be reliable and trustworthy. All you need to do is follow a few simple steps to identify the best hard money lender to take care of your needs. Please call us now at 888.334.6636 to get more info about hard money lenders in California.

Residential-Loan

Each money lender has a set of different terms and conditions along with the requirements. It is a good idea to check up on the money lenders online and shortlist a few after some research for consultation. Meet with the firms and companies and discuss your requirements, their terms and options to know what they have on offer. Compare the suggestions and various topics discussed and answers given by different money lenders, so you can decide who will be more likely to give you what you want.

Ask your friends, relatives, neighbors and colleagues for suggestions regarding California hard money lenders. People who have applied for and used hard money will be in a better position to offer useful advice and to guide you with regards to the process and counsel you to take certain important precautions.

Online reviews and testimonials from clients offer great insights about any service. Use the internet to find more information about your shortlisted money lenders and then find out what people are saying about them. There are many review and testimonial sites where customers and clients voice their opinions. When you want to move forward to the next step to secure hard money loans and have a few companies in your mind, research them on Google. Read the reviews carefully and choose the ones you think that offer the best deal and services.

After doing your research and the data you have managed to compile, you will have a pretty good idea about which California money lender will be the best fit for you. Now take all your information and data and check with an attorney. Ask for opinions on the terms and conditions, negotiate if possible and needed, then sign an agreement. Your attorney should be able to help you guide through the agreement and terms, and check for issues prior to your acceptance of the deal. Sometimes the agreement may contain terms you are not familiar with; this is where your attorney steps in to clarify and check all the documentation before you sign any agreement.

A good hard money lender will work closely with you and walk you through the entire process. Make sure your property is worthwhile because it will the most important part of your transaction. No money lender will approve of a hard money loan if your property is not worth it. Good money lenders suggest solutions to problems, offer fair and flexible terms, reasonable repayment schedule and sometimes, give extensions.

Source Capital is the direct premier hard money lender in San Diego. We offer hard money loans for both residential and commercial properties. We finance through private capital and make sure that the process is fast. We work in tandem with our clients and ensure that the whole course is finished in as little as a week. Visit us for a consultation and we will help you in any way we can.