How Hard Money Loans Work in 2024! (Easy Beginners Guide To Hard Money Loans)

what's going on investors in today's video we're going to talk all about hard money loans in 2022 so if you're a brand new real estate investor and you're trying to fix and flip a project but you need some more funds then you definitely need to watch this video see how you can use harmony loans to help you buy your next flip project this is your first time on the channel welcome my name is sean and i love real estate i've been a hard manager now for several years now and i've funded hundreds of millions of dollars worth of deals and helped dozens of investors many of which have come from this youtube channel so i figured i'd make another video here to update everyone with new terms new guidelines and whatnot and of course to break down what hard money loans are for our new investors who are just coming to the channel today so if you haven't already i highly encourage you guys to subscribe the channel to see more videos just like this one so let's hop into it so what is a hard money loan exactly a hard money loan is a loan that is going to be based on the hard assets the actual property itself more so than on your personal background so to compare a hard money loan versus a traditional loan a normal loan from a bank like wells fargo or chase will ask you for a lot of documentation about your personal income they're going to want to know your w-2 income they want to see your tax returns and they want to make sure that the income that you have can support purchasing this other property the loan also has to be done on a property that is in rent and ready condition or in good condition so the property is missing a bathroom or is just in poor condition they won't lend on it harmony lenders won't necessarily look at your income and they also won't look at the property's condition that much as long as they know that there's a deal to be had then they will likely lend to you on that deal so as an example when i first started flipping homes i had a relatively decent income working as an engineer however at that time i'd already owned my primary residence and i already own a couple of rental properties over in florida so the banks looked at my total income and said your income doesn't support this home you already own these other rentals that you own and a new property in the bay area like the numbers just don't work out on top of that the property's condition wasn't the best so it likely wouldn't pass an appraisal so i went to a hardware lender and they said sean you actually have a lot of savings you can use those savings to cover the down payment the closing costs the rehab cost and still have enough reserves and yeah maybe your income can't support this loan but it's a transactional loan so within 12 months we're gonna be in and out anyway they saw that the deal had a lot of potential and they gave me the loan so it enabled me to be able to buy this property now of course the downside of a hardman loan is that they are relatively expensive as of this recording interest rates are somewhere in the mid fives which is you know not too good not too bad but hard money rates are gonna be somewhere in the mid eights so it's definitely a lot higher but to make it less bad at least hard money loans are interest only which means that you're not paying the principal portion like you're only paying the you know 8.5 of the loan amount every single month so again they're mostly used for people who need that transactional funding something within a 12-month time frame and again the most common scenario is that they're buying a property to fix and flip it so let's go into some of the terminology behind it so the first one is ltv you're going to hear that a lot and that just determines how much your loan is relative to the value so ltv stands for loan to value for brand new investors who have never done a deal before most hardware lenders are going to limit you to 80 of ltv so if you can imagine a property that's worth 500 000 then 80 ltv is 400 000 for more experienced investors the leverage usually increases to 90 ltv so again for that 500 000 property now our loan will be four hundred and fifty thousand because that's ninety percent of five hundred thousand most people who do get harmony loans try to get the max ltv they can because they wanna leverage they wanna use other people's money now that comes out a bit of a trade-off because the more you have an ltv usually the higher your pricing will be as well so we're going to pricing next and the two big things to note about pricing are the rates and the fees so your rate is your interest rate like i mentioned before for most new investors probably going to be at an 8.5 interest rate now it's not 8.5 every single month but it's 8.5 every single year so it's 8.5 every single year and it's based on the loan amount not your purchase price so in this example let's say you're doing an 80 loan for 500 000 purchase price which means that your loan is for four hundred thousand dollars now at four hundred thousand dollars at eight point five percent interest rate your total interest for the whole year is thirty four thousand dollars so then your monthly payments are going to be two thousand eight hundred and thirty three dollars and thirty three cents so that's a common question i get like am i paying 8.5 every single month no you're paying 8.5 for the whole year and your monthly payments are that number divided by 12. the other thing to know about are the fees so typically you're gonna be charged an origination fee and processing fee origination fee is typically going to be one percent or two percent of the loan amount and that's paid up front and another one is a processing fee which is like a flat fee for all loans being done so an origination fee again scaled to the loan amount so if your loan was 400 thousand dollars and you charge one point that means your origination fees are four thousand dollars and processing fees vary between one thousand and two thousand dollars so just add that on top for your total fees of six thousand dollars for this loan hard money loans usually last 12 months although it can be flexible so some people do development projects and 12 months really isn't feasible to go through all the planning and the construction so there's ways to get around it you know you could ask for a 24-month loan a 36-month loan and some hardware lenders even offer you five-year loans or 16 month loans it all kind of depends on what you're looking for so when you talk to a loan officer really just tell them your plans and they can create something that works well for you another thing to note when talking to other harmony lenders are the prepayment penalties so some harmony lenders want you to hold on to your loan for at least three or four months again not every hard money lender does this in my company we do not have a prepayment penalty but some do so just be aware and what that means is if you do a project and let's say it goes really really well and you flip it within two months if you have a four month prepayment penalty that means that when you sell the property the lender will say well you owe us at least four months of interest payments you've only used two so pay us an additional two months and we're good to go again this is probably a negotiable thing that you can potentially wave away but just be aware that that is out there and usually for the longer term loans like the 24 month loans 36 month loans or 60 months loans those usually do have a prepayment penalty associated with it so again just be aware another thing to note are arvs so an arv is your after repair value so as a flipper you should know these numbers you should know your purchase price your rehab cost as well as your arv so that's the target that you're trying to sell a property at now one thing that many hardman lenders will look at is your arv relative to your loan amount so they want the total loan amount meaning the loan for your purchase price and the loan for your construction if you are getting rehab loan to be less than 75 of your arv so again that protects the lender that we're not giving you this big fat loan and your arv is super small because if your arv is really small relative to your loan amount that means that you're actually not going to be making any profit on the deal so we don't want to lend to deals that don't make sense and i'm sure you also don't want to get a loan for property doesn't make sense either another thing that people ask me a lot is what do they need to submit for a full file so on our side what we want to see from you guys are your id if you're going to buy through an llc then we want to see your articles and corporation your operating agreement as well as your ein number of course we also want to see your bank statements or brokerage forms to show that you have enough funds to successfully complete the deal so that usually means you know your down payment your closing costs your rehab costs and six months worth of reserves also known as six months worth of interest payments because basically if you don't have these things then you're not gonna be able to do your deals successfully we're gonna give you the big fat loan you're gonna put all of your money into the down payment and you won't have enough money for the rehab cost so then what do you do you're gonna sit on your hands and do nothing for many months and lose money no we want to make sure you're successful so you're going to look for all your big statements to show you have enough money to do the deal of course when it comes to the property itself we do need to see the fully executed purchase agreement so it needs to be signed by both parties we'll need to know your title and escrow contact information so again your realtor should know that information and then give it to us we'll likely need to do an appraisal these are not full appraisals these are known as bpos also known as broker price opinion these are way faster than full appraisals and they turn around within a week but we use that to get a good evaluation of what the property is like we get to see what the interior is like you know is it burned down somewhere or is it just a normal house and we also want to know the contact information for your insurance provider so with the heart me alone we do need a specific type of insurance usually we just ask for your insurance provider and then we do all the talking on the back end to get a policy that works for us so another thing to note are loan minimums to do a loan for a hundred thousand dollar property and to do a loan for a two million dollar property is very similar the amount of work is almost the same but the amount the hardware lender gets paid is very different between a hundred thousand dollar loan and two million dollar loan which means that they have loan minimums for our company we won't do a loan below 150 000 so that usually translates to a purchase price of around 200 000 or so there are other hard money lenders out there that will do loans for fifty thousand dollars and of course under that i would recommend just going to a private money lender find a friend or family member that believes in you and work with them for this particular deal however if you are starting to flip houses in the one million two million dollar price range most family members won't be comfortable giving you the loan so that's where you come to us to do your heartbeat loans another thing to know is on the internet on tick tock on youtube we do hear a lot of people who are doing deals with no money down i want to make it clear that it is possible to do deals with none of your own money but generally speaking if you're just starting out and you're brand new most lenders will not be comfortable giving you a loan with none of your own skin in the game because if you have none of your own money in the project it's very easy for you to walk away if the deal goes sour so you want to make sure that you stay in the deal you're accountable and that's why again for most new investors the leverage is less we only offer eighty percent ltv instead of ninety percent ltv if you really cannot afford anything and you do need a money partner have they come in as an equity partner so as long as other person is willing to be on title and sign and guarantee the loan then that's okay and as a final tip when should you and when should you not use hard money loans so you should not use a hard money loan if you know one you plan on holding on this property for a very long time and the property doesn't need any major work in that case just go with the conventional loan the rates are a lot cheaper and you don't pay closing costs twice uh you also shouldn't use a harmony loan if you're trying to buy your own personal residence most hardware lenders will only do loans for business purposes only which means rentals or fixing flip and they will not land on a property that is intended to be your primary residence you also shouldn't use a hard money loan if you're putting all of your money into one particular deal because if the market turns on you the interest rates are pretty high and it's gonna hurt and every single year you're gonna have to refinance which means more points and more fees but you should use a hard money loan if you do have the funds to do a deal you should use a hard money loan if you need to buy the deal very quickly and you can't wait 30 days for a conventional lender to give you the loan you also should use a hardware loan if it makes sense like for my first deal i paid a lot in fees and interest from harmony lender but i was able to make three hundred thousand dollars of profit on that deal so use harmony loans when they make sense but don't use harming loans when they don't make sense and of course if you guys have any more questions about getting a hard money loan feel free to contact me you can schedule call with me with the link down in the description below i'm a hard money lender and i can do loans in most states in the us i hope you guys all enjoy this video about the basics of hard work and lending in 2022. if you guys have any questions about harmony loans feel free to drop a comment down below and i'll be sure to get back to you if you thought you got any value on this video please give me a favor and smash like button to help feed the youtube algorithm thanks for watching this video guys and i'll see you next time take care [Music] uh [Music]

Channel: Sean Pan

Views: 20,699

Keywords: real estate investing, hard money loans, hard money lenders, hard money, hard money lending, real estate market 2022, investing in real estate with no money and no credit, real estate investing for beginners 2022, investing in real estate 2022, hard money loans for real estate investors, house flipping 2022, house flipping game, how hard money works, how hard money lending works, how to get a hard money loan, hard money loans five things you must know

Id: 5Upqy2zcqlA

Length: 11min 30sec (690 seconds)

Published: Mon May 16 2022