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How Do Hard Money Rehab Loans Work?
Photo montage with puzzle pieces and scattered money.

How Do Hard Money Rehab Loans Work?

For anyone working in the real estate property business, hard money rehab loans are a valuable financial maneuver designed to help individuals easily raise money for investment properties. Different from a traditional bank or credit union loan, hard money rehab loans are variations of hard money loans, designed more specifically for the rehabilitation of a property. For anyone considering a move into real estate, or who already is in the business and wants additional monetary options, a hard money rehab loan is worth considering.

What is a Hard Money Rehab Loan?

A hard money rehab loan is a lending option for when an individual or investment group is identified as an investment property worth purchasing or, in the case of a hard money rehab loan, renovating. The money offers quick financing and does not come with all the red tape and other issues of a traditional loan.

With a traditional loan, such as one from a bank, it may take days, if not weeks, to secure proper financing. By this time the property may have been scooped up off the market. Banks may not issue the desired amount of money, or the bank may refuse an investor based on credit alone, even if they have a history of successfully flipping properties.

A large number of professional flippers have a number of loans out in their name, often in different periods of repayment. Due to this, they may not have a bank’s required credit score, which in turn prevents them from receiving the loan. A hard money loan avoids these issues.

Where Does a Hard Money Rehab Loan Come From?

These hard money loans come from both individual lenders and companies specializing in hard money loans. In some ways, a hard money loan is similar to a cash advance or a car title loan, in that it is not issued by a bank, but instead a third party (the terms and conditions are different from title loans, but as an example it comes from a third-party with experience working specifically in the offering or hard money loans).

Different lenders may specialize in certain kinds of property loans. The lender will likely only provide the loan if they are confident in a borrower’s ability to use the money for financial gain. Due to this, the lender may stick with residential flipper loans, as the company understands these kinds of property flips, how long it takes, and the current interest in the market. Others may specialize in the acquisition of land or of commercial property.

For anyone interested in a hard money rehab loan it is important to look at lenders that either work with all forms of hard money loans, or who specialize in rehabilitation project loans.

According to Magnify Money (2017), non-bank mortgage loans are substantial. In fact, non-bank loans make up the highest percentage of lenders in the United States at 47.1 percent (banks make up 43.9 percent of lenders with credit unions making up nine percent). While not all non-bank loans are hard money loans, this demonstrates the value of seeking external lenders for quickly purchasing properties and obtaining the necessary financing for flipping properties.

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What Hard Money Loans Are Typically Used For?

There are a number of job specifics such a loan is used for. With a rehab loan, it’s typically used for a fix and flip job, where the borrower purchases an inexpensive home with the desire to fix it up, then sell it for more than the amount paid for the property and renovations.

Hard money loans are also often used for a quick real estate investment (such as when a current real estate project is short funded and needs a quick financial boost to complete funding), construction loans, if the borrower has credit issues and cannot receive financing through a bank, and for land loans.

The Benefits of a Hard Money Loan

Banks take time to issue loans. The larger the loan, the more time a bank spends sifting through paperwork, performing back checks on all parties involved and weighing the lending options against current credit reports, which may, in the end, result in not lending out the necessary money for the job. Other times, the screening process a potential borrower may completely miss out on their investment window.

With a hard money loan, the main benefit is receiving the loan quickly. While most bank loans may take up to 45 days to go from application to money in hand, a hard money loan often takes less than a week. In many instances, the money can be obtained the exact same day. This ability to obtain money quickly is especially beneficial when the timing is critical.

As Abbey Mortgage and Investments (2017) points out, a bank loan is beneficial for long-term home and auto purchases as these are backed by personal credit and an individual’s earning power. However, hard money loans are more suitable for real estate investments and the value of the investment is backed by the property value and, instead of extensive background checks that drag out the application process, collateral is used to offer quick capital in often a week’s (or less) time. Plus, hard money can be used for everything from hotels and industrial properties to apartment buildings, warehouses, and single-family properties.

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What to Look For When Searching For Hard Money Rehab Loans

Not all hard money rehab loans are created equal. Unlike most bank and credit union loans, which are backed by the FCC and other state, federal, and international lending laws, hard money loans do not have the same regulations. Due to this, the terms of a hard money rehab loan may vary wildly from one provider to the next.

Hard money loans are seen as a higher risk loan. The lender is taking on a greater risk as a recipient may fail with their project and may not be able to pay them back. Due to this, the interest rate is almost always higher. These loans may range between 10 and 15 percent based on the amount of money, specifics, and ability to pay the loan back. The perceived risk involved with the loan is often a factor.

The repayment period should be considered as well. Some lenders may require only interest to be paid on the loan during a set period, at which point, there is a ballooned repayment period, which is when the borrower has expected to cash in on the loan, finish the rehab and sell the property. The final repayment period, much like the interest rate, will vary on a number of factors, costs, and risks.

What is Required For a Hard Money Loan?

Unlike a bank, there is no set in stone requirement for applying and receiving a hard money rehab loan. It comes down to the lender. However, a lender will want to see a number of specifics. It has little to do with current money in the bank and an individual’s credit score. In fact, many locations will not perform a credit check at all.

Instead, the lender will want to know about the property, the project, how long the project will take, what kind of return on investment the property has the potential to bring in (and what it will realistically bring in). The lender may look at possible collateral that can be put up, should the project fail and the borrower struggles to pay back the amount obtained. This might include other pieces of property, business assets, investments, and vehicles, although each case is different from the next, so the kind of collateral required may shift.

As Maggio Capital (2017) points out, lenders are looking to protect their investments, which is why between the majority of all hard money loans are secured by a property with 30 to 50 percent equity.

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Receiving the Loan

Once the terms of the loan have been worked out the loan will be transferred over to the recipient. Depending on the lender and the amount of money offered the money might go out the exact same day or it may take a few days for everything to be finalized and end up in the individual’s account. Once the money is transferred the terms of the lease will go into effect.

Some lenders require interest payments immediately. They may also require a down payment to receive the loan (they may refer to this as a “good faith” payment). Other times the lender may not require any interest repayments for several months as this helps give the borrower some time to put the money to work, purchase the property and begin the flip and renovation.

In these instances, the faster a loan recipient is able to use the money, get to work and sell the finished project, the better off they will be as they may have more time to pay off only the interest, instead of beginning the balloon payments which are substantially more.

When taking out the hard money loan it is important to know whether or not there are any fees associated with paying the loan off sooner than later. Some lenders want the money to be paid off along the terms of the loan, so if the loan is four three years the payments continue on for three years, even if the borrower can repay the loan after two. This information needs to be identified and established prior to the signing of the loan.

One of the main benefits of a hard money private loan is the term length (when not having a long-term loan is desired). According to Maggio Capital, the average traditional loan comes with a contract length of 20 years. On the other hand, the average private loan, including a hard money rehab loan, is just five years.

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Completion of the Loan

The loan is deemed complete when the entire agreed upon amount (and term, if this is mandated into the loan) is met. If the borrower fails to make the payments and defaults on the loan the lender will then take hold of the collateral, which likely includes the property the individual used the money to renovate in the first place.

In Conclusion

There are a number of benefits connected to taking on a hard money rehab loan. It allows a borrower the ability to move out from under the thumb of a bank or credit union. Even if the borrower does not have the kind of finances available, a poor credit score or has even filed for bankruptcy in the past, little of this actually matters when taking out a hard money loan. The loan goes out quickly and can be used on a number of real estate projects, including a rehab projection. For anyone interested in moving forward into the world of real estate investing, now is the time to consider a hard money rehab loan and how it can make living the life of a professional home flipper a reality.

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