Hard money loans are a popular option for borrowers to quickly fund real estate projects with minimal documentation. However, these loans come with specific risks and challenges. Borrowers need to know the most common mistakes when applying for and using these loans. In this blog post, we'll discuss the top five common mistakes to avoid with hard money loans.
If you’re like most people, you always buy or refinance with a traditional 30-year fixed rate mortgage. You've never considered using a hard money loan — and maybe aren't sure what it actually is. But, there is an entire group of people in the real estate profession who use these short-term private loans several times each year to buy, sell and renovate properties. This blog post will explain who these people are, and why they're a good fit for a hard money loan.
Hard money loans for bad credit used to be a thing back in the housing bubble years of 2003-2007. Borrowers with low credit scores (350 to 550) or recent foreclosure activity could get a hard money loan — assuming they had enough equity in their property, which was often the main qualifier for financing.
Every week, FCTD receives inquiries from people who are not good matches for hard money loans. It's important to remember that hard money loans are primarily used by real estate investors as short-term financing solutions to acquire vacant commercial properties, or properties needing major renovations before qualifying for long-term bank financing. This active and experienced real estate investor is the ideal borrower, and best positioned to secure hard money loans. But in this blog post, I want to discuss the opposite – the borrower who is not a good fit for a hard money loan – and suggest alternative solutions better suited to these financing needs. It can be frustrating to waste time pursuing a loan that just doesn’t exist in the hard money lending world.
If you’re new to hard money lending, you’re probably not familiar with the pricing structure or what “normal” hard money loan pricing, interest rates, fees, and closing costs look like. This is perfectly normal. Unless you’re a homebuilder or active real estate investor using hard money several times each year, you shouldn’t know about these types of loans. Hard money loans are often a loan of last resort for buyers whose bank loan applications are turned down at the last minute.
You’re buying a property and your bank financing is turned down. Your real estate agent might recommend you find a hard money loan to close the transaction. Searching online, you notice a lot of information for hard money loans, and additional information about something called private money loans — which seem like the same thing. And you’d be mostly right. But while they’re very similar, there are some differences between the two terms.
A homebuyer secured a seller-financed first mortgage at 85% Loan-To-Value (LTV) and asked if FCTD could provide a hard money second mortgage for the down payment, closing costs and moving expenses. In essence, they were asking if FCTD could help with a zero down payment transaction comprised of an 85/15 seller financing, plus hard money second mortgage debt stack.
During the real estate downturn of 2008-2012, many investors flocked to foreclosed commercial property auctions on the county courthouse steps. They could acquire properties that were deeply discounted from their 2005-2007 prices. Many of these same investors, along with new participants, are now gearing up again for an increase in distressed properties —and have reached out to FCTD to secure the hard money financing to do so.
If you’re seeking private financing for your real estate project, be aware that most hard money loans have a document called a Personal Guaranty. This means that even if the loan is technically for an entity that you own or control, such as a limited liability company (LLC) or corporation, you, and possibly all the partners in the entity, must individually guarantee full repayment of the loan.
FCTD received the following loan scenario from a potential borrower trying to buy 50 acres of farmland:
