1. What is a private loan / hard money loan?
Answer: In simple terms, any loan that is not originated by a bank is considered a private loan or hard money loan. Private lenders range from large companies to any individual willing to make you a loan. The term “hard” simply references the financing’s focus on the hard asset or underlying property securing the loan.
2. When is it best to use this type of financing?
Answer: There are two main scenarios to use this type of financing. The first, is for properties that you plan to purchase, renovate and resale within a short period of time. You want to get in and get out of a project easily and quickly. This scenario is not ideal for a bank loan because they require the property to be in move-in ready condition. The second scenario would be for building a portfolio of rental properties. Because hard money lenders do not look at your personal income, the loan application process is very quick. For rental loans, lenders look at the property value, credit score and actual/potential rental income.
3. How does the cost compare to bank loans?
Answer: For rental properties, a 30-year rental loan directly in your LLC starts at 7.125%, no personal income requirements. While banks do not offer 30-year rental loans in LLCs, the interest rate is similar to commercial bank loans. In contrast, bank loans to your LLC would only be for 7-10 years. Similarly, the interest rate for a one-year bridge loan to “fix and flip” a house is difficult because banks typically do not provide short-term residential loans. In short, bank loans and hard money loans are difficult to compare because they are used for very different scenarios.
4. How do you qualify for a private loan / hard money loan?
Answer: Lenders primarily look at the value of the property you are purchasing or already own, your credit score and your investment experience. For rental financing, you typically need a credit score above 650 and no experience is required. For fix and flip financing, you need a credit score above 650 and experience flipping, but exceptions can be made for strong credit borrowers or properties with significant equity.
5. How does the process work?
Answer: Most aspects are very similar to obtaining a bank loan. You complete a loan application, your credit is pulled, an appraisal or comparative market analysis may be ordered, and we begin working with a settlement company of your selection. Where it differs is in the paperwork and requirements. Hard money lenders do not look at your tax returns and personal income. Rather, they look at your scope of work (renovation plans) and the above items to arrive at a loan amount. Because of this, hard money lenders can close significantly quicker (typically 3 weeks) than banks and chances of funding are significantly better.
