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What Are Hard Money Loans?

What is a Hard Money Loan?
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Since 2008, conversations and questions about the pros and cons of hard money loans have taken over the real estate investment world. Some private investors are still confused about the nature of these loans, while others have jumped on the bandwagon and partner with hard money lenders to fund every project.

The truth is hard money loans are relatively simple investment tools with quite a few benefits that often go overlooked. Here are the facts:

  • Equity Based Loan
    • Loan terms based on collateral
    • Not based on borrower credit score or borrowing history
  • Short-term Bridge Loan
    • Typical hard money loan terms range from 5 to 12 months
  • Close Deals Quickly
    • Use cash to close deals quickly

Intrust Funding is a hard money lender operating in Western Washington since 2008. With over 1,500 loans funded, we have proven ourselves as the leading hard money loan provider in Western Washington by having a less than 1% borrower default rate. Our key to success is that we do all our underwriting in-house, which means our underwriting principles are extremely accurate and effective.

Our philosophy is that hard money loans have value to the extent that they are used by real estate investors for short-term deals. Like other lenders, all properties purchased by a hard money loan must be non-owner occupied. Similarly, if the money will go towards property renovations that property must be non-owner occupied as well.

How Do Hard Money Loans Work?

Fix-and-flip investors are all the talk these days, and it’s due in no small part to the role hard money lending has played in real estate post-2008. One simple way to use a hard money loan is to fund a property purchase, then, if you have enough cash flow, pay for renovation out of pocket, or if you don’t, you can roll-up renovation cost in the loan. You make all your money back by selling the property at the end, or holding it to rent out, because the After Repair Value (ARV) of the property will be larger than the original purchase price.

How much money hard money lenders will give an investor in any given loan depends on the Loan to Value (LTV), which is a ratio of the loan amount to the expected After Repair Value (ARV) of the property. Many hard money lenders will loan about 65% LTV. That means if you are taking out a loan on a 1,000,000 property, a typical lender will lend up to $650,000 for that deal.  

Example: Using Hard Money Loans for Real Estate Investments

So let’s say you find a property on the market for $100,000. It’s in a good area but really needs renovation work, maybe some foundation fixes. You expect it’ll cost about $100,000 to fund the rehab. Because it’s in such a good area, there are a lot of investors looking to purchase the property. You get in contact with a hard money lender like Intrust Funding to get leverage on a deal: with Intrust Funding, you close on the property within 48 hours. And because Intrust Funding has an in-house underwriter, and determines that your new investment will likely go for $300,000 in the current market, on a 65% LTV, they loan you up to $260,000 to both buy the property and to conduct renovations. Since you only need $200,000, you don’t need the full $260,000, which leaves about a $100,000 margin for selling your property and turning a quick profit!

A Secured Investment

At Intrust Funding, we like to think of our borrowers as partners. As we see a lot of new investors making deals, we focus on borrower education, which means we only take deals we think are good for investors. As a hard money loan provider founded by real estate experts from Western Washington, we know this market well. And we won’t go in on a deal with you unless we think it is a good deal that will help you be successful in the future.

We specialize in hard money loans for real estate investors. Prequalify today and receive your first draw within 48 hours of closing!


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New to real estate investing? Learn from the pros at Intrust Funding. Become an expert by taking our Investor 101 course!


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How Hard Money Lenders Evaluate Deals

How Hard Money Lenders Evaluate Deals
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What is the funding amount of a hard money loan based on?

Hard money lenders typically fund on a loan-to-value ratio (LTV), meaning they loan up to a certain percentage of the property’s current market value, typically 65-75%. Some may lend based on of the property’s after repair value (ARV), which is the expected value of the property after renovations are complete. This is a core component to hard money lending, because it allows lenders to fund loans for investors with less than stellar credit histories, since lenders are primarily concerned with the asset being financed rather than the borrower’s financial history.

How do hard money lenders evaluate assets?

Property valuation involves several different approaches. A typical hard money lender will assess an investment property the same way an investor would. The lender will want to know if there is enough money in the deal for the investor to not only make a profit, but to also be able to pay off the loan and associated fees.

Among the documents required in order to obtain a loan is an investment remodel plan. This is a key feature lenders will evaluate when deciding whether or not to finance your deal.

In this process, hard money lenders will examine the current specifications of the property including: lot size, home square footage, location, bedroom and bathroom count, etc. A savvy lender will then research various comparable properties in the area to find out the most desirable and attainable specifications for the renovated subject property. In other words, they will assess what needs to be done to this property in order to get it into market ready condition and create the highest profit potential. Many times there are several different renovation options for the same property. Each property is different and some investors will need larger rehab budgets than others. An experienced hard money lender will review your remodel plan and either approve it or advise alternative approaches that may yield more favorable results.

Once the remodel budget has been decided, the lender will assess what the property will sell for after it has been renovated. Typically this process includes finding recently sold properties that have similar specifications that the asset will have post-renovation. By comparing the sale price of these properties the hard money lender will have a better idea of what the property will likely sell for and can evaluate the profit margin.

Will a hard money lender reject you because of the property you want financed?

Many lenders, Intrust Funding included, refuse to finance investment properties that they do not believe will be successful. In the instance that an investor is rejected because of the property, it is a good idea for the investor to either request a second opinion or not purchase the property at all. While it may seem preferable to get a second opinion, the lenders that advise against purchasing a property are working in your best interest and are not interested in attaining your collateral, but rather in funding a successful deal.

We specialize in hard money loans for real estate investors. Prequalify today and receive your first draw within 48 hours of closing!


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New to real estate investing? Learn from the pros at Intrust Funding. Become an expert by taking our Investor 101 course!


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How to Choose a Hard Money Lender: What to Look for and What to Avoid

How to Choose a Hard Money Lender: What to Look for and What to Avoid
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Pro Tip: Hard Money Lenders with High Default Rates Should Always be Avoided!

It’s the bottom of the ninth and there are two outs. Who is batting for you? You’ve done your research, your financial documents are ready, and you’ve found the investment of your dreams, but how do you decide who to trust to back you financially? Here are key characteristics to help you find a lender that’s right for you. Hit this one out of the park!

Hard Money Loans Funded & Default Rates

Because a hard money loan is funded by a private lender and not a bank, there isn’t as much red tape involved in applications and funding amounts. This is a double edged sword. It is to the advantage of borrowers that private money can move without many regulations–for instance, we use this to help borrowers fund deals quickly, as Intrust Funding can provide funding within 48 hours of approving your application–but there are others that use less oversight to take advantage of uninformed borrowers. That’s why it’s important to know both how many loans a hard money lender has funded, and what their loan default rate is. A high default rate means that a lender’s underwriting principles are either just bad or predatory. Intrust Funding has funded over 1,500 hard money loans, and our default rate knocks our competitors out of the park: it sits at less than 1%.

Local

Whether a hard money lender is local is arguably one of the most important predictors of the quality of their customer service and underwriting principles. The reason is that local lenders should know your real estate market. A local lender not only will have experience providing loans in your market, but they should also more accurately underwrite your asset with your specific market’s activity in mind. This is very beneficial for you as an investor. On average, borrowers of local lenders have a lower chance of defaulting on their loans due to greater underwriting accuracy. Additionally, local lenders tend to be more invested in your personal success and can give you more personal attention than an out of state lender.

Specialized

Just as business is a broad term, so is finance, and not all lenders are created equal. Especially when financing a risky asset such as an investment property, you want be sure you are in good and knowledgeable hands. Your lender should have specialized experience in funding a narrow range of assets. Specifically, they should not be focused on other financial avenues (traditional banking, mortgages, etc.).  Their job is to provide short-term bridge loans, period. At Intrust Funding, we think of our borrowers as partners, because an informed borrower is successful. That’s why we focus on transparency in the loan process. Our borrowers are always in the loop, understand our underwriting principles, and, whether new or seasoned, feel confident that they have competent partners who are experts at hard money lending.

Dependable with Standard Rates

As the saying goes, “time is money”. Your lender shouldn’t have any difficulty returning calls, completing draw requests, or generally answering any questions you may have. Given today’s market conditions, you may lose out on a property because you aren’t able to find financing quickly enough. One of the main advantages to using hard money is the ability to close quickly. If you find that your “opportunity cost” is increasing, you may want to look for another lender.

Another characteristic to watch out for are unusually high loan rates (i.e. 15-18% interest). Hard money loans lend on distressed properties on a loan-to-value (LTV) basis. Generally, lenders will charge around 12% interest and 2-4 loan origination points.

And, of course, with any financial decision, choosing a lender is not to be taken lightly. Your lender should be experienced (at least a few years in business) and should be able to provide you with client references and testimonials upon request.

We specialize in hard money loans for real estate investors. Prequalify today and receive your first draw within 48 hours of closing!


Get Prequalified Today!

New to real estate investing? Learn from the pros at Intrust Funding. Become an expert by taking our Investor 101 course!


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Hard Money Facts: Myths Debunked

Hard Money Facts: Myths Debunked
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Myth: Hard money loans are so-called because the lenders and their terms are hard to negotiate or approve.

Fact: Hard money loans are so-called because the lender is not a bank.

The “hard” in hard money actually refers to the difficulty of the project itself. For example, virtually every hard money project proposal harbors at least one or more of the following circumstances: money is needed quickly, often within a week; the borrower has little or no cash equity, and cannot raise a sufficient amount or is not willing to sacrifice an equity interest in the project to an investor; the borrower has a history of bad credit; the borrower has tried for several months without success to obtain financing; the project itself is problematic or has significant questions; there is no exit strategy for the loan.

Myth: Hard money loans are excessively expensive.

Fact: The nature of real estate investments does require that hard money lenders adopt a firm stance with regard to their qualification conditions, but not loan terms.

Hard money loans are actually priced just like any other loan. If a Fortune 500 lender were offering a quote on the same loan, their pricing would be very similar. The difference is that it would not be referred to as “hard money” simply because of their status as a lender. Therefore, a borrower seeking quotes for comparison on a hard money loan will generally find the competitive proposals to be priced very similarly. The final choice, then, should be based on the lender’s reputation and ability to close, the conditions associated with each proposal, and the chemistry between the two parties.

Myth: Hard money lending companies are disreputable loan sharks.

Fact: Most heads of hard money lending firms have successful backgrounds as investment bankers, real estate developers, lawyers or accountants.

To be successful (read: profitable) hard money lenders must be capable of both assessing risk and closing loans. They are professional business people who understand the way the system works. As hard money lenders base take the After Repair Value of an investment as the most significant factor in underwriting a loan, real estate expertise is essential for success. In fact, Intrust Funding’s Portfolio Manager has an ARV projection accuracy of 98%, making Intrust Funding’s loans some of the most secured in the industry.

Myth: Hard money lenders want you to fail so they can obtain your collateral.

Fact: Most hard money lenders only fund investment properties that they think will succeed.

Hard money lenders have an unfair reputation of preying on unsuspecting borrowers in an effort to take their property. While there are bound to be scams out there, most hard money lenders are not like this. The truth is that it is in the hard money lender’s best interest to protect your investment and theirs. While not all hard money lenders are investors themselves, many are, and hard money lenders are well versed in evaluating investment properties.

Since hard money has not been standardized like traditional mortgage lending has, the borrower experience can vary widely from one lender to the next. It’s possible that hard money lending’s negative reputation stems from upset borrowers, but the cost and time associated with loans can be a drain on the lender’s resources, so hard money lenders truly want your loan to be successful and paid off.

If you’re new to investing or new to borrowing you may be hesitant to borrow from a hard money lender, however, hard money is an excellent alternative to all cash or strenuous bank financing. In fact, Intrust Funding’s simple, efficient, and reliable loan process has been a hit with veteran and amateur real estate investors in Western Washington. We’re proving that borrowers can be partners.

We specialize in hard money loans for real estate investors. Prequalify today and receive your first draw within 48 hours of closing!

Get Prequalified Today!

New to real estate investing? Learn from the pros at Intrust Funding. Become an expert by taking our Investor 101 course!

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Why Choose a Hard Money Loan over a Conventional Loan

Why Choose a Hard Money Loan over a Conventional Loan
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In general, obtaining financing for an investment property can be difficult. Since conventional loans can be hard to obtain, many investors are utilizing hard money lending. But this begs the question, why don’t banks lend to investors?

The Conventional Loan Conundrums

Timeframe of Closing

The key to acquiring investment deals in competitive marketplaces like Seattle is the ability to close quickly. Banks are typically unable to provide financing in short time frames, causing investors to miss out on potential investment properties. Banks also require additional documentation and information regarding the status of the property that may not be accessible at the time of purchase.  

Property Condition

If your property is undergoing more than a few cosmetic repairs, traditional lenders are reluctant to supply funds. Often this is because of the risk of acquiring an asset in serious disrepair due to an investor’s inability to perform value-add renovations. Banks have become more cautious because historically their real estate mortgages have turned toxic; meaning the mortgage underwriting the property is valued higher than the property itself. For example, if you request a loan to buy a house worth $200,000, but you will need an additional $50,000 for repairs, your lender will not approve the $250,000 loan because the property is not currently valued that high. Additionally, many banks require the home to be in livable condition regardless of its status as an investment property.

Credit Standards

Credit requirements are much tighter than they were before the bubble burst. Factors including credit scores, payment history, and length of established credit affect your ability to acquire a conventional loan in today’s market.

Risk

It is well-known that investing in real estate is risky. Not only are investment properties often in need of significant renovations, but, with the market tightening, many homes are purchased without an inspection contingency on the offer. Even just a few unforeseen circumstances in a project can alter the construction budget and skew projected profits. For this reason, conventional lenders prefer to finance new construction projects rather than rehabilitation projects.

Application

Banks must be compliant with the Federal Deposit Insurance Corporation (FDIC), requiring borrowers to provide an extensive amount of information prior to obtaining a loan. Some of the information required includes but is not limited to tax return documents from the past three years, business financials, personal financials, and credit checks.

The Advantage of a Hard Money Loan

As an alternative to conventional lending, many investors are using hard money lending.

A hard money lender allows you to close in days, rather than in weeks or months. Intrust can provide funding for closing within 48 hours typically. Furthermore, hard money lenders rely less on your credit status and more on the asset that you plan to purchase as the most significant factor for loan approval. Given their reliance on the asset as a component for loan approval and their familiarity with the real estate market, hard money lenders are more disposed to financing rehabilitation projects than conventional lenders. One reason is because hard money lenders like Intrust Funding underwrite investment properties based on expected ARV (after repair value) rather than current property value. As a result, neither credit score nor property condition are significant factors when investors apply for hard money loans.

Hard money lenders, as opposed to conventional lenders, designed their services with the real estate investor in mind. Although the reasons why hard money loans are superior to conventional loans are many, the few listed above are the major reason why hard money lenders are becoming the best way to fund real estate investment opportunities.

We specialize in hard money loans for real estate investors. Prequalify today and receive your first draw within 48 hours of closing!

Get Prequalified Today!

New to real estate investing? Learn from the pros at Intrust Funding. Become an expert by taking our Investor 101 course!

Sign Up for Investor 101!
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Investing 101: Choosing the Right Hard Money Lender

Investing 101: Choosing the Right Hard Money Lender
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The key to becoming a good investor is to use hard money loan programs to fund your profitable deals. Even more important is finding the right lender! It’s no surprise that shopping around for a lender can be a daunting task. We’re here to help make the process more streamlined. It’s all about knowing basic information about hard money loans and being equipped with the right questions.

The first step is to determine what kind of hard money loan you are seeking. Are you developing commercial properties, or remodeling residential properties? Good hard money lenders know exactly what type of loans they will and will not consider. Deciding which category you belong to will increase your chances of getting the best possible loan, while eliminating options that do not suit your needs.

When comparing hard money lenders, another factor to consider is their interest rates. Typically, lenders charge anywhere between 12% – 16% in annual interest.

Similarly, you will want to know the basic loan terms. Details such as loan length, re-payment frequency, and down payment should be outlined in writing clearly for the borrower to understand and agree upon. If a lender fails to complete this very vital step, do not continue business with them.

Next, analyze your upfront costs. Does the cost get rolled into your loan or do you need to pay towards it at closing?

Keep in mind, if it seems too good to be true, it probably is! Don’t move forward with anything you feel uncomfortable with, even if it seems like a good deal. It may be that the lender you decide on has slightly higher interest rates but is a safer and more reliable bet than competitors. Once you find the right lender, look up customer reviews. Check out their website for any testimonials, as well as the Better Business Bureau. A lot can be learned about a lender’s policies and conduct by simply reading about other peoples’ experiences with them.

We specialize in hard money loans for real estate investors. Prequalify today and receive your first draw within 48 hours of closing!


Get Prequalified Today!

New to real estate investing? Learn from the pros at Intrust Funding. Become an expert by taking our Investor 101 course!


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Facts about Hard Money Lending

Facts about Hard Money Lending
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If you’re not well-informed about the real estate or finance industries, the topic of hard money lending might be a bit perplexing. What exactly is a hard money loan, and how does it differ from your typical bank-funded loan? When discussed between investors, money is considered either soft or hard. Hard money is typically easier to obtain and the terms are fairly flexible. Soft money, on the other hand, is much more restrictive and its terms are quite specific and strict. Most hard money originates from private investors, rather than your average lending institution. The terms of hard money lending vary with each lender. Some companies lend solely on the deal or the value of the property, while others take more than equity into account.

Typically, hard money lenders will support 65% of the after-repair value on a property. Since the loan amounts tend to be advanced in larger amounts, most hard money loans are considered to be short-term. A proposed term of six to twelve months return-time is the lending standard. Interest rates on hard money loans usually range between 12%-18% and are based on risk, assets, and current level of debt. In addition to the initial loan, closing costs are also considered when calculating the rate. It is also very common for investors to offer up other real estate properties as collateral to ensure a larger loan amount. This transaction is known as “cross-collateralization,” learn more about this process on our Equity Loan page.

So how do you know if a hard-money loan is the right option for you? In most cases, individuals choose to use hard money when they cannot obtain traditional mortgage financing due to inadequate credit, lack of supporting documents, timeframe of closing, and/or condition of the property. Borrowers should be absolutely certain that they have the resources to pay off the loan when it is due, making an almost spot-on loan amount extremely vital to the process. Estimations made too low cause for a shortage in repair materials and time, while those made too high put the borrower at risk of becoming delinquent.

At any rate, if you need hard money to close a real estate investment deal, fund rehab or renovation projects, or simply to bridge the gap between immediate costs and long term financing, check out our Hard Money Loan Programs and prequalify today!

We specialize in hard money loans for real estate investors. Prequalify today and receive your first draw within 48 hours of closing!

Get Prequalified Today!

New to real estate investing? Learn from the pros at Intrust Funding. Become an expert by taking our Investor 101 course!

Sign Up for Investor 101!
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