As the real estate landscape gets sophisticated with time, investors’ needs are also changing. Nowadays, seasoned investors scout for the best money lending opportunities that give them a chance to make huge profits with little risk. In other words, the hard money lending market is slowly changing and adjusting to meet the needs of the borrowers.
Today, some private money lenders offer competitive rates, while others give out 100% financing on specific projects. Therefore, every investor would want to partner with such lenders and benefit from incredible lending deals. Below, we have covered more about hard money lending and no-money-down hard money loans.
What is a hard money loan?
A hard money loan is a collateralized loan given by professional private money lenders, often to real estate investors looking to purchase a priority. Under the loan agreement, the borrower/investor will use the property purchased as security. In return, the lender funds 50% to 75% of the property’s cost, which means the investor has to make a minimum down payment of 25%.
Most hard money loans follow a similar structure, but some only offer specific perks to gain a competitive edge in the market. Hard money lenders are also lenient when it comes to credit history, and they process the loans faster, often within a week or two. This makes hard money loans very attractive to real estate investors, especially professional house flippers.
What are no-money-down hard money loans?
As the name suggests, a no-money-down hard money loan doesn’t require the investor to make a down payment. In other words, the lender offers 100% financing for the property to be purchased. However, unlike the down payment ones, this hard money loan comes with some unique requirements.
The two most common requirements are:
- The property should have an ARV (after repair value) of less than 70-75%.
- The investor should cross-collateralized the loan, i.e., use an additional property with enough equity as security.
After Repair Value (ARV) of less than 70- 75%
The ARV represents the property’s value after repairs and other services. This value is estimated by referencing the property with similar and comparable properties within the neighborhood sold within the last 90 days. A total of six to ten comparable properties may be used to find the average price of the property you want to buy. The estimated cost is often presented per square foot.
If the estimated ARV of the property comes down to $200,000, most lenders will use this formula to find the maximum offer price. That is:
The Maximum loan offer = (70-75% of the ARV – repair costs).
If the property’s repair cost is $25,000, and the lender accepts a 75% ARV deal, the maximum loan offer becomes (75% * $ 200,000 – $25,000) = $125,000.
To get 100% financing, the cost of the property will need to be equal to or less than the maximum loan limit offered by the lender.
Cross-collateralization
Cross-collateralization allows you to purchase a property with a hard money loan and with no money down. If you are to buy a $600,000 property with a hard money loan and already have another free and clear property worth $600,000 or more, you could use this property as second or cross collateral.
Ideally, you’ll be applying for a $600,000 loan, yet the total cost of the assets is $1.2 million. This means the Loan-to-Value ratio is 50%. One of the benefits of cross-collateralization is that you can secure a very attractive deal without spending even a penny. This is an excellent option for professional house flippers with several properties and little cash to put down on some properties.
Even if the cross collateral property doesn’t bring the LTV to 50%, you could still lower the down payment to 10 or 20%. The only risk with this option is defaulting on the loan and losing both of your properties.
Hard money loan requirements
Whether you are going for the ordinary hard money loan with a down payment or the no down payment option, the lender will prioritize some requirements. These include:
- Real estate experience – Hard money lenders prefer to hedge their risks by working with seasoned investors who understand the market well.
- Overall financial strength – a real estate investor with other income sources or several assets is low-risk to hard money lenders; hence, they may quickly secure the loan.
- Available cash reserves – Despite getting 100% financing, you may be required to pay some expenses, such as fees and marketing costs out of pocket. The lender might take it as a red flag if you don’t have any cash to settle these costs.
Choose your options wisely
Depending on your unique needs, you want to choose a flexible and reliable lender with reasonable lending terms and rates. A no-money-down hard money loan may be an attractive option for some investors, but it could become a trap for some. So, always look beyond the current situations. Assess the risks and understand the implications of every deal before going all in.
Hence, you are really supposed to consider all the aspects carefully. This is how you will get to know and understand hard earned money loan.
