Hard Money Lenders Morristown

A hard money lender is a type of non-bank lender that provides loans secured by the value of a property rather than focusing on the borrower’s creditworthiness. While both banks and hard money lenders offer mortgage loans, the criteria and processes they use differ considerably. Hard money lenders emphasize the underlying asset more heavily and often disregard the borrower’s credit score or income details. Their underwriting process is much faster, frequently allowing loans to be approved and funded within a week, unlike banks which may take months. This fast turnaround is beneficial for real estate investors who buy foreclosure properties at auctions, as those purchases often require quick closings. Hard money lenders also fund loans on properties that banks reject, such as those missing a Certificate of Occupancy. Borrowers with less-than-perfect credit will find hard money loans accessible since credit scores weigh less in the decision. These loans are also useful for refinancing or pulling cash out from investment properties. It is important to note that hard money loans are only available for investment properties and do not apply to primary residences.

Due to the fact that hard money loans are much easier and faster to acquire compared to a conventional mortgage, the interest rates are higher. Typically, these rates range from 9 to 12 percent, and there are additional fees of 1 to 3 points charged at closing. The loans typically have a term length of one to two years. Hard money loans usually come in two segments: one segment finances the purchase price, often covering between 70 and 85 percent of it, while the other segment finances the rehabilitation work needed to bring the property up to date. Many hard money lenders will cover 100 percent of the rehab costs. If no rehabilitation is required, the loan will not include this portion. Rehab funds are generally distributed after each phase of work is completed, also known as funding in arrears. For example, if a total rehab budget is $50,000, the borrower may finish $15,000 of work and then receive that amount in funding from the lender. This continues until the entire rehab budget is funded. The total loan amount, combining purchase and rehab funds, typically will not exceed 65 percent of the property’s after-repair value (ARV).

Since hard money loans are commercial loans, these lenders only extend financing to LLCs and not to individual people. If you don’t already have an LLC, don’t worry; it’s easy to form one and it can have just a single member, you.

Hard money lenders look carefully at both the purchase price and the after-repair value (ARV) to ensure that the loans they provide will be repaid. Buying a property at or below its market value plays a big role in qualifying for a loan. If rehab funding is part of the loan, the lender expects that all repairs follow the agreed-upon schedule. A clear title is essential as well. Any judgments or liens on the property or on the borrowing LLC must be cleared before the loan is funded.

It is important to a hard money lender that their borrowers make investments that will yield a profit. Essentially, the lender wants you to make money on your real estate project so that the loan is repaid. They ensure that there is adequate “spread” in the transaction, which means the ARV will cover the purchase price, rehab costs, loan interest, closing expenses, and any other fees with enough leftover to make the deal financially worthwhile.

A hard money loan is usually utilized in these key real estate investment scenarios:

• Funding the purchase and repair of a property that traditional lenders decline due to its condition or the borrower’s credit profile. Once repaired, the property is usually sold to retail buyers, known as a “fix and flip.”
• Buying rental properties and renovating them when banks refuse to finance these projects. After rehab, the property is considered “stabilized” and can be rented, qualifying it for a conventional refinance with better terms.
• Completing purchases under tight time constraints that banks cannot meet, such as foreclosure auctions. Hard money lenders often close within a week, while banks require much longer.
• Pulling quick equity from owned properties through a cash-out refinance using the property as collateral.
• Quickly refinancing a loan before maturity to prevent default or penalties.
• Purchasing properties under an LLC’s name, which is easier with hard money lenders because traditional lenders seldom finance LLCs.

While hard money loans and flip loans are related, they are not synonymous. Hard money loans are offered by private lenders like West Forest Capital and are designed to serve a wide array of real estate investment purposes, with emphasis on the underlying property rather than the borrower’s credit. Flip loans are a distinct type of hard money loan aimed at investors who intend to acquire, renovate, and then quickly sell properties for profit. Although flip loans fall under the broader category of hard money loans, many hard money loans fund different types of real estate investments beyond flipping.