Hard money lenders, also known as private money lenders, offer special types of financing designed for property development. These lenders provide fast, up-front funding for acquisitions, construction, and renovation that lets builders, landlords, flippers, and others get their projects started and finished on schedule.
If you’re thinking of using a hard money lender, it’s important to understand the services they offer, how much they will charge, and what you can expect. We’ll break down the most important questions to ask a private money lender to maximize your return on investment and decide if this type of funding is right for you.
What are the benefits of using a hard money lender instead of a traditional loan?
Mortgages and other traditional loans from banks and institutional lenders can be an option if you plan well ahead. However, the world of real estate development moves very quickly, and it can take several weeks to get a traditional loan or mortgage approved. Private money lenders offer several significant advantages:
- Speed: Loans can be approved quickly, and you could have access to the money in as little as seven business days.
- Simplicity: The process of applying for a hard money loan is often much simpler and easier than for a traditional mortgage.
- Flexibility: A loan officer from a private lender will work with you to find the best loan product for your project, often customizing it to fit your individual needs.
- Scrutiny: A hard money lender won’t scrutinize your personal finances as closely as a traditional lender. Instead, they are most interested in the value of the completed project.
WHAT TYPES OF REAL ESTATE FUNDING DOES THE LENDER PROVIDE?
A good private money lender will have specialized loans based on the type of construction or development you’re managing. This is important because lenders have modeled their risks, interest rates, and terms based on types of projects. Finding the right funding product for your project gives you more flexibility. For example, here at Streamline Funding, we offer loans for:
- Residential new construction
- Residential renovation
- Residential development
- Land acquisition
- Multifamily renovation
- Landlords
- Cash-out and refinance
WHERE DOES THE HARD MONEY LENDER PROVIDE LOANS?
Different lenders support different regions. Some might be able to offer loans across multiple counties, while others will only focus on local financing. A local lender will understand your marketplace much better, which means they’ll take a more personalized view of your project than a national one will. Talk to potential lenders to see where they can provide funding.
CAN YOU GET PREQUALIFIED FOR A PRIVATE LOAN?
In some circumstances, it’s worth getting qualified for a loan before you need it. That way, if you come across a great real estate deal, the private lender can get the money to you quickly.
HOW MUCH COLLATERAL DO YOU NEED TO PROVIDE?
Hard money lenders lend money that’s secured against your real estate project. The value of your construction or development is the “collateral” you provide in return for funding. Private lenders take into account the total cost of the project and what the finished development will be worth when it’s sold. A lender will be able to provide an estimated value, typically based on an appraisal or BPO, for the collateral you need to provide, depending on how much you want to borrow.
HOW MUCH MONEY CAN YOU BORROW?
Every lender will set the amount you can borrow around several different factors. These might include:
- The “Loan to Value” (LTV) of the property: The amount you’re borrowing, compared to the overall value of the finished project. For example, if a project will be worth $300,000, and the lender offers up to 70% LTV, they might consider lending up to $210,000. Streamline can typically offer up to 70% LTV for renovations and new construction projects.
- The “Loan to Cost” (LTC) of the property: This is similar to LTV, except instead of comparing the amount you’re borrowing to the finished value, the lender looks at the total cost of your project and makes a determination on how much to lend. For example, at Streamline Funding, we can typically offer up to 95% LTC for residential new construction.
- The “After Repair Value” (ARV) of the project: The value of real estate after it’s been improved, renovated, or fixed up.
- Minimum and maximum loan sizes: Some lenders put lower and upper limits on how much they’re prepared to fund.
- History of borrowing: If you’re applying for follow up loans and have successfully borrowed in the past, a lender may be more likely to approve your request.
HOW MUCH OF A DOWN PAYMENT IS NEEDED?
A lender will not provide all of the money needed to pay for a project. Ask the lender what their LTC is, as that’s the maximum they will fund towards the project, and you’ll need to come up with the rest. For example, if they provide 80% LTC, and the project will cost $150,000, they could fund up to $120,000, meaning you’d need a down payment of $30,000.
WHAT DOES THE LENDER CHARGE TO INITIATE A LOAN?
Private lenders typically charge an up-front fee to administer a loan and provide you with funding. The cost of this loan is based on “Points” with each point being one percent of the amount you’re borrowing. For example, if you need $200,000, and the lender quotes 3 points, the initial fee would be 3%, or $6,000. Many lenders make adjustments to these initial points and costs based on credit scores, your borrowing history, and other areas.
WHAT INTEREST RATES DOES THE PRIVATE LENDER CHARGE?
Hard money lenders do charge higher interest rates than a traditional mortgage or bank loan due to the additional risk. However, your monthly payments will typically be interest-only and you’ll be responsible for paying off the principal balance at the end of the loan term. The interest rate is the single biggest influence on how much you’ll repay. Most private lenders charge interest rates between 9% and 14% a year, depending on the purpose of the loan. You’ll also want to ask how the interest is calculated. For example, is it applied on a daily basis, or over some other time period?
WHAT ARE THE REPAYMENT TERMS?
The frequency of repayments and the length of time it takes you to repay will have a significant impact on your capital and interest payments and your cash flow. Ask the lender about the loan repayments you’ll need to make on a regular basis and how long your loan term will be.
CAN THE LOAN BE EXTENDED?
It’s important to understand if an extension would be available for your loan due to unforeseen circumstances. Establishing this with a lender before you need an extension can be less costly than needing to ask for one once you’ve taken out the loan.
DOES THE LENDER CHECK PERSONAL CREDIT SCORES?
Most private money lenders are more interested in the details of your project and the collateral you provide than your personal credit history. Although they may review some of your finances in a loan decision, credit scores don’t play as big a role as they might for banks or other traditional lenders. It’s important to note that issues like bankruptcies within the last two years, tax liens, open judgments, fraud, and other white-collar crimes may mean you won’t be eligible for a loan.
WHAT DOES THE LENDER NEED TO PROVIDE A QUOTE?
You will need to provide project details, cost estimates, market values, and other documents to get a quote for a loan. These requirements vary between lenders, so find out what you need to get started and ask how soon you can have a quote.
GET A HARD MONEY LOAN THROUGH STREAMLINE FUNDING
We hope you’ve found this guide to finding the right hard money lender helpful. Use this list when you’re evaluating lenders for your next real estate project.
If you’re in Texas, we can help. We’ve lent out over $500 million for real estate projects, and we’d be delighted to help you. 5 minutes is all it takes to see if you qualify through our loan pre-qualification application. As always, we’re here for you. If you have questions, comments, or need help—feel free to reach out to us.