Hard money loans are a home loan option for borrowers who have credit issues, little to no income documentation or a property with problems and cannot qualify for a conventional loan. They are issued by private financial specialists or organizations rather than by a bank, which permits more adaptability in setting terms and assessing risk.

1. Simpler Loan Applications

Since complex bank guidelines are not included, the hard money application process is simpler and can frequently be approved in a shorter amount of time. Credit scores can typically be lower with hard money loans. Less income documentation is required as well. In addition, unlike banks who will deny your application because of deffered maintenance on your property, ARC Private Lending can still lend on properties with issues.

Three to four week closing period is typical for these loans, yet ARC Private Lending has been able to close a loan in four days.

2. Bridge Loans

Sometimes, hard money loans are compared with “bridge loans”.  A “bridge loan” commonly refers to a short term loan taken out by a borrower against a property they currently own to finance the purchase of a new property. These loans are usually short term in nature. A bridge loan is typically used to get access to immediate cash flow until permanent financing is secured. Hard money loans can be very helpful when you can’t wait weeks to get the cash you need.

3. Loan-to-Value Ratio

The Loan-to-Value Ratio, or LTV, is an important element in hard money lending. Let’s start out first with how to calculate LTV. It really is pretty simple. You take the amount of the loan and divide it by the total value of the securing property.

So let’s say for example that a borrower is buying an investment property worth $100,000. They have $20,000 for a down payment. That means they will need a hard money loan for $80,000. What then is your LTV? You will simply calculate 80,000/100,000 = 0.80. (Loan Amount/Home Value=LTV). Your LTV is 80%!

It is important to note that the home value is not what the borrower is purchasing the house for or what the house was listed for on the market. The home value is the appraised or current market value.

The higher the LTV, the higher the risk for the loan; the investor will have to lend larger sums of money. This is usually due to the fact that borrowers with high LTV properties have less invested in that property. Take the above example, if a borrower only has $20,000 of their own money invested in a property they are more likely to just walk away if financial crisis hits. However, if they have $50,000 invested, making the LTV 50%, they are less likely to walk away. It’s all about how much “skin you have in the game”.

With a bank loan if you have a low LTV but you also have bad credit you are more than likely going to be denied. With a hard money loan if you have a low LTV and bad credit chances are you can get approved for financing.

4. Information Required

Hard money loans require much less documentation than institutional bank loans. Banks typically want your loan application with an application fee, 2 years of W-2’s, up to 5 recent pay stubs, 2 years most recent tax returns, 3 months of your most recent bank and investment statements, proof of other assets, proof of debts, employment verification, 2 years of residential history, current credit report, property appraisal, title report and more.

Hard money loans again require much less, such as your loan application, credit report, title report, and property appraisal. Depending on the borrower and the circumstances of the loan a property appraisal is not always required. In addition sometimes other information like proof of assets will be needed.

5. Interest Rates

Interest rates for hard money loans can range from 8% to 12%. Although the interest rate is higher than a bank loan it can give you the immediate cash you need that you would not qualify for at the bank. Furthermore, with most hard money loans having interest only payments, your monthly payment is manageable. Hard money lenders offer short term loans to help a borrower until they can get into more permanent financing with lower interest rates.

6. Loan Points

Loan points are also known as the origination fee. A loan point is calculated as a percentage of your total loan amount. One point is one percent of your loan. For example, on a $100,000 loan one point is equal to $1,000. The loan points are used to compensate the loan officer.

Conclusion

As you can see there are several key differences between a hard money loan and a bank loan. Hard money lenders can be more flexible when it comes to qualifying a borrower for financing. Criteria that would get a borrower a loan denial at the bank such as credit score, income documentation or property problems would not necessarily affect your chance of getting financed with a hard money lender.

Contact ARC Private Lending today with your questions?