Hard money lending is a method of borrowing a loan without resorting to conventional mortgage lenders. The loan will be provided to you through an investor or any other individual(s), and the amount of the loan will be calculated based on the value of the property that you are going to have to put up as collateral.
Hard money borrowing is suited for when you need a loan as soon as possible, or your application for a loan is denied by a mortgage lender, a bank, or any other financial institution.
The rates associated with hard money loans will considerably differ from one lender to the next. Moreover, the loan will also differ based on the particular type of loan and the terms and conditions associated with the loan the borrower seeks.
Because hard money lending falls into the category of ‘private loans’ or ‘private lending,’ the rate of interest charged will also be higher compared to traditional money lenders, for example, a bank or a credit union. Nevertheless, the interest rates on these types of loans generally start at 8% and go as high as 14%.
The best way to go about finding a hard money lender for competitive rates on loan is to get quotes from several different lenders. The amount of interest a lender will charge will also be based on the current market rate. However, it is important to keep in mind that interest rates for these loans will not fluctuate as per the federal funds rate.
Rate variations in hard money loans
The rates charged by hard money lenders may show volatility considering the requested LTV (loan to value). So, if the ratio of the LTV is higher, the lender will charge you a higher interest rate, which is strict to compensate for the risks involved for the lender. However, if the LTV ratio is lower, the lender should not have a problem giving you a lower interest rate.
Furthermore, if the borrower is financially secure, he can negotiate a lower interest rate and safeguard lender risk. Lenders are more accommodating for individuals who show no risk of defaulting on the loan.
On the other hand, if the property or real estate you are putting up as collateral is located in a remote area or is somewhere undesirable, the lender will charge a higher interest rate.
The lender will be taking a big risk providing you with a loan; after all, this is not a traditional means of financing. This also means that there is a good chance the lender will not ask for your credit history, income, or broad-spectrum documentation. All of this increases the lender’s risk, which is also why he will charge you a higher rate.
Moreover, increased interest rates are also seen as a commission or a fee for providing the borrower with a quick source of financing that a bank or any other traditional lender will never be able to match.
Points on the loan
Lenders also typically charge points on the origination fee for the loan. These points can vary from 2 to 5. The number of points charged can also be based on the type of loan requested and the terms and specifications requested by the borrower.
The points are also based on the time of the loan, the complications associated with the lender to arrange the loan, and the rates competitors are charging for the same types of loans requested by the borrower.
The loan origination fee is calculated by the points on the total amount of the loan owed by the borrower. For example, two points on the loan would constitute 2% on the original loan amount.
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So, if you ask for a $200,000 loan, 2% on it would mean you are going to have to pay $4,000 as the loan origination fee.
Other costs and fees associated with hard money loans
In some cases, a hard money lender Houston will only ask for points – and that will envelop their entire fees. However, some may also charge you points atop other fees for documentation, underwriting costs, administration fees, and processing fees.
So, as a borrower, do not forget to ask whether or not the potential lender is going to add all these costs with the points. Your objective should be to minimize the total cost of the loan as much as you can.
Closing costs for hard money loans
Also referred to as third-party fees, you may have to pay the closing costs on loan acquired atop the loan origination fees. These third-party costs are standard fees that are associated with real estate transactions and are required to be recorded and closed professionally.
Here is a list of third-party fees:
- Title insurance
The accurate amount of the fees will depend on several factors such as the size of the funds, city or state where the loan is recorded and the extent of services provided by the third-party.
Why it is a good idea to opt for a hard money loan?
- Fast funds acquisition – Hard money lenders do not mostly concern themselves with lengthy documentation processes such as mortgage lenders, banks, or credit unions. Most will not even ask for your credit scores. This makes the process quicker and virtually hassle-free.
- The versatility of the loan – The terms and conditions associated with the loan may be flexible compared to banks and credit unions because lenders do not resort to using a traditional underwriting process.
- Loan approval – This is perhaps the biggest advantage of a hard money loan, if you put up collateral (which is in the form of a property), you will get a loan that is worth the total value of the property. The value of the property is what a hard money lender cares about.