We all know that hard money loans are short-term loans that use real estate as collateral. Borrowers seek out this unique type of funding to buy and fix up a property. These days a lot of investors use these loans to buy and renovate properties over about a year. These are excellent borrowing options for those who flip houses, and there are many to choose from. If you are interested in a hard money loan, you must know your options.
Fix and Flip Loans
You will find that fix-and-flip hard money loans can come with relatively high interest rates, but are paid back over a reasonably short period. There are no additional fees charged for paying back one of these loans early, which can reduce the interest you pay. These private lender loans usually have a term of 1 to 3 years, and funds are typically disbursed within 15 days. Interest rates vary from 7 to 12 percent, and lender fees go from 1.5 to 10 percent.
You will need to meet specific qualifications before you can get a flip and fix hard money loan. You will need a credit score of at least 550, and a debt-to-income ratio of anywhere from 35 to 45 percent. It is also essential that you’re able to demonstrate experience with rehab projects or licensed contractor help. Those with at least a couple of years of experience with rehab projects will benefit the most from this type of loan. Even people without this experience can still get a fix-and-flip loan.
Many private lenders featured in our Hard Money List are based entirely online. You can fill out an application through the lender’s website and wait to hear back. If approved, you should receive your funds within a couple of weeks.
Cash Out Refinance
A cash out refinance hard money loan is when someone who fixes and flips real estate refinances a current property that is in play to buy a new property as an investment. This enables investors to get maximum equity from their existing property by borrowing money to pay off the mortgage. When the new cash out loan is given to the investor, it is referred to as a “first lien.” Any current liens, including the first mortgage, must be paid back in full before any equity can be extracted.
The investor uses the difference between the new loan and mortgage to pay for other properties they can flip and fix up before selling. One of the best things about this loan is that there are no limits on how the borrower can spend the money they receive from the lender. Investors can use a cash-out refinance or “cash-out refi” for up to four units of owner-occupied and non-owner-occupied properties.
Cash out refi loans have a payoff term that can range from 15 to 30 years, and it typically takes anywhere from 30 to 45 days to get approval with most private money loan companies. The interest rates for these loans can go from 2.99 to 5 percent. The loan origination fees are 3%, and the closing costs range from 2% to 6%. This is a viable borrowing option for many fix and flip investors. Many of us have traditional refinance options like working with a mortgage company, bank, or Federal Government program. But there will always be a situation where you need cash fast. That’s where a cash out refi from a private money lender can help.
Second Trust Deeds
This form of real estate financing is like a long term mortgage in many ways. It allows the borrower to obtain private-lender funding to purchase a property by using it as collateral. With a 2nd deed trust, different groups are often involved with the real estate investment. There is a person who is initially the private real estate financier and a trustee. You will often see a title company or banking institution retain the title to the property until the loan has been paid off in full.
The laws regarding which security instruments can be used vary from state to state. A second trust deed can be a home equity loan backed by a financial institution or a second mortgage. If someone has a second trust deed, one is already in place that uses the property as collateral. The first trust deed acts as the original mortgage for the property.
Build to Flip
A build to flip hard money loan is a good option for experienced property investors who want to build a new property from the ground up. These short-term loans can help investors finance the construction of new properties to sell them later. Some funds from this type of loan are disbursed at closing to cover the cost of lot acquisition.
The loan amount is based on the lot value and repair or construction expenses. No minimum credit score is required to obtain one of these loans, which is why they are so incredibly popular with investors. This type of loan doesn’t require much paperwork, so the process is much faster overall. Compare companies that provide build to flip and cash out financing in our directory of hard money lenders.
Rental Refinance
Those who want to build up their real estate portfolio might consider a hard money rental refinance loan. Over the past few years, this has become one of the more popular types of hard money loans. You can refinance your rental property in as little as 10 days, as the process for obtaining one of these loans is quite expeditious. No minimum credit score is required, and it’s a great borrowing option for many people.
There are a few requirements for these real estate loans you should know about. You can choose the rental refinance option only for single-family residences with 1-4 units and investment properties. This is a great option for investors who want to pay off the mortgage on their investment properties at a lower interest rate. If you are having difficulties making payments on the original mortgage, this loan can certainly help. You must submit proof of income when applying for rental financing from a private money lender.