When real estate investors come to me for a hard money loan, they may or may not need to have a formal appraisal on their property. Appraisals in hard money are hit and miss, dependent on which lender the mortgage broker places the loan with, how that lender is structured, and what the lender requires for a valuation prior to funding the loan.
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Hard Money Loans
If you’re taking out a hard money loan, one thing to consider is setting up an interest reserve to cover the monthly payments for a few months or for the entirety of the loan, whichever you prefer. An interest reserve can be a great tool for managing the cashflow of a project, allowing an investor more time to focus on the building rather than the finances.
A hard money loan balloon payment is the total principal balance of the loan plus one monthly payment due in full at the end of the loan term, which is usually 6-24 months from the start of the loan. Balloon payments are a common feature of hard money loans as most are short-term bridge loans with interest-only payments rather than 30-year amortizing loans like conventional mortgages.
If you’re new to hard money lending, it’s good to know how the prepayment penalty works, which can be different than with traditional financing like bank loans or NonQM loans. This blog post will explain the difference between traditional prepayment penalties and the two hard money loan prepayment penalty types that you're most likely to see on a bridge loan and longer-term loan.
When using hard money loans, is it best to work with a direct lender or a mortgage broker? This is a question that real estate investors, who have been using hard money loans off and on over the years, probably think about from time to time. It’s also a question I get asked, as a hard money mortgage broker, by borrowers wanting to know if it makes sense for them to work with me or to “cut out the middleman” and go direct to the money source.
If you’re new to hard money lending, you’re probably not aware of the many different types of hard money loans that real estate investors regularly use to finance new acquisitions and to make renovations to existing properties. This growing segment of the mortgage market continues to provide capital for properties that are not bank financeable due to their condition or to high vacancy rates. Hard money loans are used all the time but their usage outside the real estate industry is not widely known or understood.
When most people think of hard money lenders, including real estate agents, conventional mortgage brokers, escrow and title officers, they mostly think of an individual investor who funds a few loans per year or a local hard money lending company that funds fix and flip transactions. The reality is that the industry has expanded significantly beyond local lenders to nationwide hard money lenders originating loans and selling to pension funds and Wall Street investors, which has led to greater loan product offerings for the end user, the real estate investor.
A hard money loan is a short-term asset-based, or equity-based, loan secured by real estate and funded by a private investor, or multiple private investors, as opposed to being funded by conventional lenders such as banks or credit unions. Hard money loans are generally used by real estate investors as a short-term bridge loan with a duration of three months to three years, after which the investor will either sell or refinance the property.
A little while back, I had a conversation with a friend rolling $250,000 from their 401K into an IRA after leaving the company they’d worked at for eleven years. The friend was asking me about setting up a Self-Directed IRA for trust deed investing, lending the money out at 9.00-10.00% compared to simply rolling their retirement money into a Roth IRA with Vanguard.
First Capital Trust Deeds is a California-based mortgage broker specializing in mortgages for real estate investors, including Private Money, NonQM, Conventional, and Bank Portfolio programs. FCTD holds broker and/or lender licenses in five states: