Most of us are familiar with different types of mortgages for purchasing or refinancing real estate. Whether you're buying a house, condominium, or commercial property to fix and flip or rent out–you know there are fixed rates loans for 15 and 30 years as well as loans with variable rates. You're probably also familiar with conventional, VA, and FHA loans. But, what is a Hard Money Loan (sometimes called a Private Loan)? Read on to find out more.
It's not money borrowed from a bank or a big institution. It's money borrowed from a private individual or individuals. You've probably borrowed money from friends or relatives. That's a loose example of a private loan. But in that case, it probably wasn't "secured" with anything other than your promise to pay it back.
When a Private Money investor or lender loans out their money, it’s not surprising that the fees and rates charged are higher than what you'd receive from a credit union or bank.
There are several reasons. For example, if your past credit history isn't that great. Maybe you've had a short sale, bankruptcy, or foreclosure. No lending institution, bank, or credit union will loan to someone with a recent bankruptcy. But Private Money lenders will.
Another big reason investors and house-flippers love Private Money Loans is that they may have a property that a bank won't lend on. The property isn't in good enough shape and up to the bank's standards. Maybe it needs some major rehab work done before the bank would even consider lending on it.
If you need your funds in a hurry, don't count on a bank, you'll only wind up frustrated. One significant advantage of Private Money lenders is that they can move fast. You'll get the cash you need generally much quicker than going through a big institution.
One thing to know about Hard Money loans is they are based almost solely on equity. That means you'll have to have some skin in the game to play. Generally speaking, you'll need to have at least 35% equity in the property (if you're refinancing). If you’re purchasing a property, plan on having 35% to 40% to put down of your own money. And that's your own money - not from another lender. Here are some examples:
Office Building - You've found a great deal on an office building in Pinellas County. The price is $400,000. You would need to have a minimum of $140,000 to put down yourself to borrow the remaining $260,000.
Single Family Home - There's a super good deal on a house in Clearwater, but it needs work so the bank won't lend on it. They're asking $200,000. Be prepared to put down at least $70,000 and finance the other $130,000.
If you need a loan on a home you're planning on living in, Hard Money might not work – you’d need to call us so we can get more information. You may need to go through a bank. Hard money is mainly for investment property like rentals, or a home you're going to fix up and immediately flip, or a commercial property like a restaurant or office building.
We all know that property in Tampa Bay is hot, and if you happen to find a good deal–you have to move fast. Here's an example: You see a house that's $250,000 and a super good deal. You have almost all the cash you need - you're just short $100,000. The problem is, even though you have $150,000 to put down, no bank will give you a loan because of your credit. But a Private Money lender will, and it will probably be done pretty darn fast.
Are you a contractor who's found your dream dumpy home? Congratulations! But don't expect to get money from a bank until it's in great shape. With Hard Money, as long as you have at least 30% to put down, you have a good chance of getting enough to fix up the dump and sell it for a nice profit or rent it out for monthly cash flow.
Clearwater Mortgage is a Florida Broker (Company NMLS# 921372) with over 20 years of experience in lending.
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