Most Los Angeles Hard Money Lenders will tell you that Hard Money Loans are generally the quickest route to financing rehabs or property flips. Additionally, Hard Money Loans are approved based on the property’s value rather than the buyer’s qualifications. Regardless of that fact, hard money tends to be more expensive than traditional financing.
Hard money lenders supply short-term money, ideal for flipping but it can get a bit pricey at times. It’s essential that you understand the potential loan amount, the upfront costs involved, ongoing interest charges and total costs of having the loan over the period you need it.
Understanding The Calculations Behind Hard Money Loans
There are a handful of figures you must clearly understand when it comes to hard money loans. These include purchase price, after repaired value, repair costs, the lender’s expected loan to value ratio, interest rate, term, and upfront points and fees.
Know your purchase price. Our Los Angeles Hard Money Lenders say if you don’t have a purchase price, try and figure out the estimated, projected, or expected purchase price.
After Repaired Value (ARV)
If you are doing a fix and flip, our Los Angeles Hard Money Lenders suggest that you understand the estimated resale value of the property after you rehab it.
Get a better idea of your estimated budget for repairs.
Loan to Value (LTV)
As with any lender, hard money lenders will loan a portion of what’s needed. That is usually expressed as a percentage of the purchase price, or alternatively the after repaired value (ARV). For example, a company might lend 90% or the purchase price. Another might lend 70% of the after repaired value.
Is the Loan Based on Loan to Cost (LTC) or After Repaired Value (ARV)?
Our Los Angeles Hard Money Lenders say some lenders base the loan amount on the purchase cost (called loan-to-cost or LTC), the purchase cost plus repairs, or the after repaired value (ARV).
Term of Loan
Hard money loans are short-term, typically months. Understand the timeline for you loan (usually anywhere from 1 month to 24 months). This will be used to so you can get a better understanding of your interest charges over the period you have the loan.
Our Los Angeles Hard Money Lenders suggest you anticipate the interest rate you expect to pay for the hard money loan. Always remember, hard money lenders don’t charge prevailing mortgage rates like you get with long-term mortgages. Instead, Hard Money Loan rates can be as high as 12%-18% as compared to current mortgage rates which are usually in the 4% range.
Points and Loan Origination Fees
Los Angeles Hard Money Lenders typically charge fairly hefty points compared to conventional mortgages, generally in the range of 1-7 points. Points are a form of prepaid interest; each point represents 1% of the loan amount.
What You Will Need for a Hard Money Loan Application
Most Los Angeles Hard Money Lenders will tell you, whether you’re in the business of flipping houses or renovating a rental which you’ll eventually refinance with a permanent mortgage, when you apply for a hard money loan or other private financing you will usually need to provide the following:
- Information on the property itself (location, type of building, square footage, condition, etc.)
- Purchase price – a signed contract is best, but if you are in the preliminary stages, you can supply an offer price even if it isn’t formal.
- Project budget – if you are rehabbing the property, a solid project budget is necessary. Most lenders will want contractors’ bids. If you plan on doing the rehab yourself, the lender might ask for information on past projects to demonstrate you know what you are doing.
- Timeline for rehab
- After repaired value (ARV) – it’s best to get a real estate agent’s or appraisers comparative market analysis of the estimated after repaired market value for the property.
The Los Angeles Hard Money Lender will then verify all of this data gathered.
Furthermore, while the loan is principally based on the property value, our Los Angeles Hard Money Lenders say you should be prepared (especially if you are a new customer) to supply basic personal financial information such as:
- Credit score – each Los Angeles Hard Money Lender will expect a minimum credit score. A score of 550+ is the usual threshold.
- Income verification – normally this will be verified with W-2’s or tax returns
- Personal financial information – often, bank balances will be requested
- If the property is being bought via an entity like an LLC, be prepared to supply financials and information for the company along with personal finances
Los Angeles Hard Money Lenders say Hard Money Loans are one of the fastest routes to financing rehabs project or house flips. Hard money’s benefit is that it’s usually approved based on the property’s value over the purchaser’s qualifications.
However, hard money should only be though of as short-term financing. Ultimately, it can be expensive, both in terms of upfront points and fees and interest, and the costs should be examined in the light of how much profit the renovation or flip will create.