A Hard Money loan for a “fix and flip” real estate investment means borrowing the property-purchase and rehab money by mortgaging the property that you’re going to flip. In other words, you’re using your planned investment property as collateral for the loan. Loan closing is done very quickly to ensure that you get the property, especially in a competitive fix-and-flip market where there are many others looking at that flip opportunity.
A hard money loan is not conventional borrowing from a traditional lender, such as a bank or other financial institution. Also known as ‘short-term loan’, ‘private money loan’, ‘fix and flip loan’, or ‘rehab loan’, hard money is funded by private investors or lenders. The time frame of repaying the loan is fast – usually around 12 to 18 months – due to the nature of the intent to quickly rehab the property and get it back on the market to make a profit.
The approval process for a hard money loan is typically much quicker and easier than a conventional loan because the lender just needs the security of property instead of the long-term financial security of the borrower. The loan amount a lender can offer is derived by the loan-to-value ratio (LTV), which is a loan amount divided by the value of the property used as a security.
Hard Money loans are ideal for these situations:
- Fix and Flips: Fix and flip residential property investors often use private, hard money loans to quickly secure their investment property and then get fast access to the rehab money for “fixing” the property. The faster the better. When the property is fixed and sold, the investor re-pays the loan and keeps the profit.
- Credit score issues: If the borrower has credit score issues, getting a loan approved by a traditional system can be a roadblock in purchasing the investment property. Hard money loans are ideal for them, as the lender is not as concerned with low credit ratings because the property is held as the security against the loan. The lender is mostly concerned about the borrower’s research, preparation and commitment to get the property quickly fixed and flipped.
- Time constraint: Conventional loan borrowing from a bank takes at least 30-40 days, as it needs significant cross-checks of credit score and history, current financial condition, employment verification, etc. Whereas, approval and disbursement of a private, hard money loan are easier, quicker by nature, often within 10 days from pre-approval to the closing of the property and access to rehab money.
It’s recommended to get pre-approval for upcoming or future real estate investments. If you are already flipping properties or planning to start, and you don’t have a current property opportunity, getting pre-approved for a hard money loan is quick (within 24 hours at MM Lending), and no cost. Then, when you have a property opportunity, you have the advantage of moving directly on the closing to secure the property in as little as 7 days.
Here’s a list of typical requirements to qualify for a hard money loan:
- Geographic location: The loan approval may be dependent on the specific location, especially when working with a local, private lender. This is typically not an inconvenience, as experienced investors often have a preference for the responsiveness and competitive rates of local lenders.
- Pre-qualification documentation and paperwork: Paperwork is minimal for a local hard money loan, compared to a bank loan, however, there are a few basic requirements: Credit score (which can be below 700 for a hard money loan), discussion of experience and current property opportunity, and minimal financial documents, such as tax returns and bank statements.
- Experience in fix and flips can mean lower rates on hard money loans: For first-time borrowers in fix and flip residential property investments, their interest rate on a hard money loan may be a little higher than the rate of an experienced investor who has already demonstrated ability to fix and flip properties on a schedule, which means less risk to the lender. The difference in rates for experience will be more likely and significant with local, private lenders.
- Property type: The properties that are eligible to get hard money loans are residential units with single-family, multi-family, residential units, commercial property, land, and industrial property.This may vary from lender to lender. I.e., MM Lending only loans on non-owner occupied, single-family residential (this includes 1-4 apartments), and does not loan on raw land, commercial, or industrial. Note, multi-family residential can often refer to 5+ unit (large complexes), which are classified as a commercial loan.
Re-payment method:
Monthly payments for short term loans are either in the form of only-interest or interest combined with some principal amount. Although, the repayment terms vary from lender to lender. The condition of the property can decide the repayment method.
Conclusion
You wouldn’t be borrowing hard money for a fix-and-flip loan if you don’t already have experience in residential real estate investment, or if you don’t have an ideal flip opportunity with research and preparation for the rehab project and budget. In either of those scenarios, it’s in your best interest to initially and frequently compare rates among lenders, and to get to know your local lenders. Pre-approval and rate quoting are quick and at no cost, which can ultimately help you ensure the greatest profit in the shortest time-frame of a fix-and-flip project.
MM Lending is a hard money lender offering hard money loans that cover 90% of the property purchase price and 100 % budgeted rehab cost. Get -approved for your hard money loan quickly and conveniently now.