Typically used for various real estate investing projects, hard money loans are specific types of mortgage loans. Traditional lenders don’t offer these types of loans in Florida or any other state. Instead, the lenders are private money lending organizations and individuals.
As with other financing solutions, private money loans have their pros and cons. While they are perfect for some investors and specific scenarios, they may not work for others. To determine whether you can benefit from a private loan in Florida, you must first understand how hard money financing works.
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Hard Money Loan Structure
Business practices between private lenders vary significantly. Since they aren’t dependent on regulations dictated by the Federal Reserve, they have plenty of space for customization when it comes to their offers.
Often, the lenders base the rates, terms, and fees on some particular preferences and whether they would or not be willing to participate in a specific investment project. For example, some hard money lenders only approve loans for commercial buildings, while others prefer residential projects.
Many lenders like RBI Mortgages Miami are incredibly flexible and offer financing solutions that may fit various project types.
It’s necessary to research the lenders in your area to make proper comparisons and calculate which one offers better terms. The information you gather will help you choose the one that fits your needs most.
Application and Approval
When applying for a traditional loan or mortgage, the bank will first want to make sure you can afford the monthly rates. They will request a property advisor to ensure the loan doesn’t exceed the overall value of the estate.
Moreover, it takes 30 to 45 days for a bank to approve a loan in Florida.
With hard money loans, the lender is most interested in the deal. Does your financing plan make sense? Are your repair, building, and sales plans well-structured? How do you budget your renovations? Have you determined a positive ARV (after repair value) of the property covering all loan costs on time?
Unlike banks, private lenders focus on your project, your ability to plan accordingly, and the investment’s overall potential success.
Typically, a lender will approve and fund a hard money loan in seven to 14 days.
Terms
At its core, a private money loan is most often a short-term loan with a six-month repayment period. It is ideal for real estate investors looking to buy, quickly renovate, and sell properties for profit. In such projects, it’s essential to move fast with the building and renovations. It’s also crucial to promptly sell the property and pay out the loan because each additional monthly loan rate represents a decrease in profit.
Many private lenders offer loans with terms ranging from between several months to two years. Also, some of them include balloon payments, meaning you need to repay the loan principal in full at the end of the term.
In case you cannot repay the loan, you will have to pay penalties or refinance the loan. Since the lender uses the property itself as collateral, they may legally take over its ownership if you fail to repay what is due.
Interest Rates and Points
The points and interest rates usually vary from region to region but also from lender to lender. If a specific area has many private lenders, the rates and points are generally lower than sites with fewer lenders.
For example, Florida has convenient rates because there are more than a few lenders in the area. In comparison, California features even lower rates because it has a vast selection of hard money lending firms. Once the competition increases, the rates go down.
Hard money lenders take on significantly more risk than banks do when they approve a loan. Due to high stakes, the interest rates on private loans are higher than conventional bank loans, ranging from 10-15%. The rates often depend on the loan-to-value ratio.
Down Payment Requirements
Just as banks, many private lenders require a down payment. They need to see if the borrower is willing to invest some of their own money in the property, in addition to checking property repair and financial plans.
While down payment rates vary a lot, private lenders generally require around 10% of the property’s value. The lender defines the down payment ratio based on the property’s loan-to-value (LTV) ratio.
Keep in mind that instead of using the purchase price when defining LTV, many private lenders use the property’s after-repair-value (ARV). It can be quite handy if the borrower doesn’t have the funds to cover the renovations. However, when a lender uses ARV, they usually make up for the risk by employing higher interest rates and points.
Moreover, not all private lenders require down payments. Some of them are willing to finance 100% of the property’s purchase price. Although it comes with higher interest rates, many expert investors use this option for quick house flips.