A Guide to Hard Money Lender Terms and Loan Process

Hard money lenders offer a unique financing option for real estate investors, but understanding the terms and loan process can be overwhelming.

The loan process typically involves a short application period, often taking just a few days to a week to complete.

A hard money lender's loan-to-value (LTV) ratio can vary, but it's often between 50% and 70% of the property's value.

Hard money lenders usually charge interest rates between 8% and 14% per annum, depending on the loan terms and the lender.

The loan term can range from a few months to a few years, giving borrowers time to renovate and sell the property.

A typical hard money loan requires a down payment of 20% to 30% of the property's purchase price.

Hard money lenders often have a prepayment penalty clause, which can cost borrowers a fee if they pay off the loan early.

Hard money lenders have varying rates, which you should consider when comparing them. This can make a big difference in the overall cost of the loan.

Reputation is a crucial factor to consider when comparing hard money lenders. A reputable lender will have a good track record of working with borrowers.

Make sure to understand each lender's requirements, including the minimum income and credit score you'll need. This will help you determine which lenders you're eligible to work with.

Lenders may have different terms, such as the down payment required. Be sure to ask about these terms when comparing lenders.

A loan to value ratio is a crucial factor in understanding the terms of a hard money loan. It's the amount of outstanding debt on real property divided by the fair market value of the property.

We believe in clear and simple loan terms, which is why our promissory note is written in large font and only spans two pages. This makes it easy for borrowers to read and understand before signing.

Interest is a crucial aspect of any loan, and it's essential to understand the different types. Interim (or Prepaid) Interest is paid by the borrower at loan closing from the funding date to the end of that month.

Periodic Interest is the money owed each period as defined by the note, usually monthly. This can help borrowers budget and plan for their loan payments.

The interest rate is the percentage rate that lenders charge for the use of their money, also known as the note rate. This rate can vary depending on the lender and the borrower's creditworthiness.

Here are some common types of interest:

Interest reserves are funds paid by the borrower and held by the lender for future interest payments, typically on construction loans. This ensures that borrowers have a clear understanding of their interest payments over time.

The interest rate for hard money loans can start at around 9% and upwards, depending on the borrower's credit score and investment experience. This is significantly higher than the average mortgage rate for a traditional, 30-year fixed loan, which is currently 6.44%.

A security interest is a vital concept in the world of lending, and it's essential to understand what it entails. A security interest is an ownership interest that a lender takes in the borrower's property to ensure repayment of the debt.

This type of interest is typically established through a mortgage or deed of trust. In other words, the lender gains a claim on the property itself to guarantee that the borrower will pay back the loan. A security interest is a way for lenders to mitigate their risk and ensure they get repaid.

A lien is closely related to a security interest, as it's a legal claim on real property, usually for the payment of a debt or obligation. Think of a lien as a warning sign that the property is being held for a specific purpose, such as paying off a loan.

Here's a breakdown of lien positions:

In summary, a security interest is a crucial aspect of lending, and understanding its intricacies can help you navigate the world of loans and property ownership.

Hard money loans can cover up to 90% of the property purchase price, which is a significant amount of financing.

The loan amount can also include rehab costs, making it a convenient option for investors who need to renovate a property.

The loan to value ratio is a crucial factor in determining the amount of debt on a property, which is calculated by dividing the outstanding debt by the fair market value of the property.

The principal balance of a loan is the outstanding amount that doesn't include interest or other charges, which is an important consideration when determining the loan's overall amount.

Private lending is a viable option for borrowers who don't qualify for conventional loans. A non-conforming loan, also known as a Jumbo, Alt-A, or subprime loan, is a type of loan that doesn't meet traditional financing guidelines.

Hard money lenders, also known as private money lenders, specialize in providing short-term loans for real estate investments. These loans are typically short-term, ranging from 6 months to 5 years, and have a solid exit strategy in place.

Security interests, such as a mortgage or deed of trust, are often taken by lenders to ensure repayment of the debt. The loan-to-value ratio is a key factor in determining the amount of debt a borrower can take on.

Hard money loans are often used for fix-and-flip projects, bridge loans, construction loans, foreclosure prevention, and loan fallout situations. These loans offer fast funding and are popular among investors who plan to sell quickly.

Here are some common uses for hard money loans:

The time frame for closing a loan request and approving it is a crucial aspect of commercial real estate investing. Timing can make or break your investment success.

Hard money lending typically takes anywhere from 3 days to 2 weeks to close a loan request and approve it. This is significantly faster than conventional mortgages, which can take up to 4 weeks or even a few months to process.

Conventional mortgage lenders can take a long time to even say no to your loan application, which can be frustrating for investors who need to act quickly. In contrast, private money lenders can approve loan requests at lightning speeds, especially if you've built a good relationship with them.

Here's a comparison of the time frames for hard money lending and conventional mortgages:

With private money lending, you can get your loan requests approved quickly and make your investments on time, every time. This can be a huge advantage for investors who need to act fast to secure a good deal.

A balloon payment is a large sum or the total loan balance paid at the end of a loan term, which is common in private lending. This payment is due because the loan balance remains, and interest is only paid monthly.

Hard money loans have a shorter lifespan than traditional mortgages, typically ranging from 12 to 24 months. This shorter term means you'll pay less interest over the life of the loan, which is a plus for investors.

The maturity date is the date when the full loan balance, accrued interest, and fees are due to be paid off. This date is defined on a note or loan modification agreement.

Here's a comparison of hard money loan and standard home loan repayment terms:

In a hard money loan, you only pay the interest portion of the loan on a monthly basis, and the principal amount is paid back when the house is sold.

Mortgages are paid in arrears, which means you're paying interest on the previous month's loan.

This is in contrast to rent, which is due on the 1st of the month and pays for the renter's use of the property for that month.

Arrears is a term that describes accrued interest payments, and it's the reason you get a month or so buffer between closing the loan and making your first payment.

As a result, there's still remaining interest due when you go to pay off your loan.

Mortgages are paid in arrears, giving the owner control of the property for a month before making a payment.

A loan default is a serious situation where the borrower has been notified by the lender as being in default of their agreement.

The lender has the discretion to decide when a loan is in default, meaning a loan may be delinquent but not yet in default.

A notification of a loan default is the first step in the foreclosure process.

This notification marks the beginning of a potentially long and complicated process for both the borrower and the lender.

A balloon payment is the payment of a large sum or the total loan balance to be paid at the end of a loan term.

In contrast to an amortized loan, a balloon payment is a one-time payment that's usually much larger than the regular monthly payments. Most Private Lenders only require that the interest be paid monthly, leaving the loan balance intact until the end of the loan term.

Northwest Private lending allows for partial payments to be made during the life of the loan, giving borrowers some flexibility.

A hard money loan monthly repayment can be quite different from a traditional mortgage repayment. In fact, a recent example compared a standard home loan to a hard money loan, and the results were surprising.

The standard home loan had a loan amount of $200,000, an interest rate of 5%, and a loan term of 360 months. The monthly repayment was a whopping $1,073.00.

A hard money loan, on the other hand, had the same loan amount of $200,000, but an interest rate of 10% and a loan term of just 24 months. The monthly repayment was a staggering $1,666.67.

Here's a comparison of the two loans in a simple table:

Despite the higher interest rate, the total interest paid on the hard money loan was actually lower than the standard home loan. This is because the hard money loan has a much shorter lifespan, typically just 12 months, and you only pay the interest portion of the loan on a monthly basis.

The maturity date is a crucial deadline in the loan repayment process. It's the date when the full loan balance, accrued interest, and fees are due to be paid off as defined on a note or loan modification agreement.

This date is the last day you can make payments on the loan before it's considered past due. The maturity date is typically specified in the loan agreement, so it's essential to review this document carefully.

Understanding the maturity date can help you plan and prepare for the final payment. You can use this knowledge to ensure you have enough funds to cover the remaining balance and avoid any late fees or penalties.

Hard money lender terms can be complex and overwhelming, but understanding the additional costs and fees involved can help you make informed decisions. Northwest Private lending's policy is to extend performing loans for free, which is a relief for borrowers.

Some hard money lenders charge an extension fee, which can be an amount or a percentage of the loan balance being extended. This fee is not always clearly stated and can catch borrowers off guard.

Hard money loan points are a fee charged by the hard money loan provider, usually between 2-5% of the loan amount. Closing costs are another category of expenses, including lender's fees, title insurance and Escrow fees, attorney's fees, recording fees, taxes, and property insurance.

Here is a breakdown of the typical closing costs you can expect:

An extension fee is a cost associated with extending the duration of a loan, typically charged by lenders as a percentage of the loan balance or a fixed amount.

Not all lenders charge an extension fee, as Northwest Private lending's policy is to extend performing loans for free.

Lenders often charge an extension fee to cover the additional time the borrower has to pay off the loan, which can impact the lender's revenue stream.

The extension fee can be a significant cost for borrowers, especially if they're unable to pay off the loan within the original duration.

If a lender does charge an extension fee, it's essential for borrowers to understand the fee structure and potential impact on their loan terms.

Forced Place Insurance can be a significant additional cost for homeowners, especially if they're not aware of it.

The lender places this insurance on the property in case the borrower's own coverage lapses, which can happen if payments are missed.

The premium is advanced by the lender, and the borrower is billed to be paid within 30 days.

This type of insurance can be a surprise to many homeowners, and it's essential to understand the terms and conditions of the policy.

The borrower is responsible for paying the premium, which can add up quickly, especially if they're already struggling to make mortgage payments.

In some cases, the lender may not even notify the borrower that the insurance has been placed, so it's crucial to review the loan documents carefully.

You'll need to pay closing costs, which are the fees associated with getting a loan. These costs are paid at the close of the transaction and can include lender's fees, title insurance and escrow fees, attorney's fees, recording fees, taxes, and property insurance.

Closing costs can add up quickly, so it's essential to factor them into your budget. A typical closing cost can range from 2-5% of the loan amount.

Hard money loan points, also known as origination fees, are a fee charged by the hard money loan provider. This fee is usually between 2-5% of the loan amount.

Finance charges, also known as points, are paid at closing and can be a flat fee or a percentage of the loan amount. For example, one point on a $100,000 loan is equivalent to $1,000.

Here are some common closing costs to expect:

Pre-payment penalties can be a significant added cost when paying off a loan early. This penalty is a fee imposed by the lender if you pay off the loan before it's due or before a specified time period, as defined in the loan's note.

A pre-payment penalty can be a percentage of the outstanding loan balance, and it's usually calculated based on the loan's interest rate. This means you'll need to review your loan agreement carefully to understand the terms and any potential penalties.

Paying off a loan with a pre-payment penalty can be a costly mistake if you're not aware of the terms. It's essential to consider the loan's terms and any associated fees before making a decision.