Hard Money can be a quick way to supply everything from residential homes, to industrial properties to new home building. I will not get into every aspect of hard money but I will offer you a general frame work that your mind can understand. First of all most hard money lenders will allow you to finance up to 65% of the value of the home.
If the loan is for rehab purposes, they'll use the "after-repaired value" of the house as the basis point. I have seen occasions that went as high as 75% but 65% is the norm. These loans are per case basis and very flexible so there is a lot of space if the package makes sense. It may be a set back if you are new to investing but luckily that can usually be offset with adequate cash reserves and a good plan of action. Let's look at an investor rehab loan to visualize how the numbers work.
Let's say you came across a beat up old house in a good neighborhood where homes sell for $100,000. The seller takes you through the home and you determine that the property needs approximately $12,000 in repairs. You have gotten pre-qualified for a rehab loan and want to know what is the maximum you should pay for the house.
To keep it simple for starters, you want to take $100k x 65% - loan costs - repair costs/holding costs = Purchase price. Loan costs, for hard money loans, run from 8-13% of the total loan amount. They are not cheap but it's less money than you'll disburse to a partner! For now we will assume costs of 10% and holding costs of $2,000. Given those numbers, you probably shouldn't pay more than $45,000 for the home. If you decide to pay more, that just means more money out of your pocket to get the deal done. Here are a few quick tips you can utilize to maximize the likelihood of being approved for hard money loans, in general: 1.
The more equity in the home after the loan, the better, 2. The higher your credit score, the better 3. The more credit history you have, the better! 4. The more liquid assets you can show that you have personally or have guaranteed access to (lines of credit, partners, rich uncles. . .
) the better 5. The more populated the area, the better 6. The faster the properties in that area sell, the better 7. The more solid the appraisal value, the better! A lot of hard money lenders like to use fire sale values as the basis point of the loan so don't be shocked.
This is definitely not the time to use stretched values. All in all, this is a numbers game. Do not allow yourself to get attached to a property if the numbers don't benefit you. Hard money lenders can be flexible but bring them a deal where the numbers don't add up and it could cost you a crucial relationship for future investments.
Credit doesn't always matter but it does help, tremendously, if you can show good credit history.
William Hopkins is an 9 year mortgage veteran specializing in hard money loans and bad credit mortgages. For more information on the loan programs he has available, visit http://www.mountaintopmtg.net.