A common question about hard money is, does hard money work the same way as cash when buying a property? The short answer is no, but there is a more complete explanation.
Hard money loans are often used in situations where the purchase of a property has to close quickly. Sometimes, this is because the quick close was necessary to get the offer accepted over competing buyers. Other times, it is because the original loan fell through and the buyer had to scramble for a fast solution.
Regardless of the reason, many buyers and real estate agents think of hard money loans as the same as cash. After all, when was the last time a bank closed a loan in just a few days? (In case you were wondering, the answer is never.)
Hard money, also known as private money, is typically handled by a broker with individual investors providing the money for the loan. Because one investor can review an entire loan file in a short period of time, sometimes in as little as a few minutes, it is impossible for a bank to compete on speed.
Their processes are split between different people. They have one person to collect data and set up the file, another one to underwrite the file, another to review the appraisal and another to close the file. This is a simplified version and it usually has more people to handle other steps. The fact is that they aren’t set up to move quickly.
Speed alone can cause hard money to be considered the same as cash but it is still a loan and it requires someone other than the buyer to approve it and produce the money needed for the loan.
You have probably seen listings that said they would only accept cash offers. This is almost always because the seller thinks that the property won’t qualify for any kind of mortgage. In most cases, they are wrong because hard money is used for exactly that type of property.
When making an all cash offer, it is almost always required that you provide proof of funds. The seller and their real estate agent want to see that you have the cash to close. And if you are getting a hard money loan, the lender isn’t going to give you a copy of their bank statement to prove they have the cash you need.
The proper way to handle it would be to make the offer showing that you are using a hard money loan to buy the property. Hard money is still a loan and a pre-approval letter is needed to go along with your offer. It may need to say something about the condition of the property not being a problem. A properly worded pre-approval letter can make all the difference in the world in getting your offer accepted.
Another important key is that the loan officer who wrote the pre-approval letter has to be available to talk to the listing agent before the offer is accepted. This can be the final requirement before an offer will be accepted.
So even though hard money is similar to cash and can be almost as fast, it is not the same.
ITIN is the abbreviation for Individual Tax Identification Number. It is the number issued to individuals who do not have or are not eligible to have a Social Security Number. They are used by individuals without Social Security Numbers for federal tax filing purposes with the IRS.
Banks don’t typically lend to those who have an ITIN. This isn’t because they aren’t eligible to buy property or get a mortgage. There is no restriction on buying a home just because one has an ITIN. Banks just don’t lend to them.
The most common solution for someone with an ITIN to own real estate is through private money loans (aka hard money). This is because private lenders aren’t so worried about the little details the banks focus on. Instead, they look more at the property value and the down payment than anything else.
Another big problem for many of these buyers is that they don’t have sufficient credit. Often, they think they can’t get any kind of credit unless they have a social security number. This is completely untrue. I have worked with many clients who have well established credit that they used their ITIN to get.
(For more information on credit and how to establish it, go to CrackMyCredit.com.)
Fortunately, private lenders aren’t as worried about credit as the banks so even if you have no credit at all, that shouldn’t stop you from getting a mortgage to buy a property.
The only real requirement for buying a property (other than having the money or getting a loan to buy it) is that you have to be able to prove your identity and you have to be able to prove where the money came from. In other words, just because someone has an ITIN is no reason they can’t own real estate.
This is part 2 of 2 in a short series to clear up some of the questions and misunderstandings regarding owner occupied hard money loans. In this post, I will cover bridge loans and temporary loans.
Bridge loans are fairly well known, at least in terms of the name, if not what they actually are. Temporary loans are similar to bridge loans but not exactly the same thing.
A bridge loan is specifically a loan that is used to buy a property before selling another one. These are short term loans, usually no more than 12 months. There are three basic ways to set on up.
The first way is to use both properties as collateral for the loan. The second is to use only the property already owned as collateral. The third is to use only the property being purchased as collateral. Deciding which option works best for you is something you may need your loan officer to help you with.
Whenever a bridge loan is done, an exit strategy is needed because the lender wants you to have a plan of how you will pay off the loan. They don’t want to foreclose any more than you want them to foreclose.
There can be many valid exit strategies. Probably the most common is to sell the property you already own. In the case where this strategy is used, the entire loan can be paid off from the sale of the property. In some cases, there isn’t enough money to pay off the entire mortgage so a new smaller mortgage is needed at the time of the sale.
Your loan officer should be able to help you figure out your ideal exit strategy and even if you already have it worked out, it is a good idea to go over with him or her to make sure it is workable.
Temporary loans are also short term, just like bridge loans, but they have a different setup and a different purpose. When you have enough equity in your property, are unable to get a loan from a bank and need a short term solution, a temporary loan may be an option.
They are typically setup with no more than a 12-month term and, if the property is your primary residence, there is no prepay penalty allowed.
Regardless of the reason for needing a temporary mortgage, whether it is due to bad credit, income that can’t be proven or a property that won’t qualify for a bank loan, the biggest factors in being able to get approved for one are the equity in a property and having a good exit strategy.
There has to be enough equity in a property to give the lender the comfort to not worry about their investment in lending you money. They have to have confidence that if anything goes wrong, they won’t lose money. You should also want this because you want to make sure you have the ability to pay off the loan and your equity can play a big part in that.
A good exit strategy is one that has a reasonable likelihood of working to the benefit of all. Once again, the exit strategy is something your loan officer should be able to help you with.
I could go on for days explaining all the different ways these loans work but rather than doing that, if you have questions about it, please call or fill out the contact form on our site.
Owner occupied hard money is one of the most misunderstood subjects in the mortgage industry. Most people, including mortgage brokers, hard money lenders and even attorneys, don’t understand how it works.
Many of them will tell you it can’t be done. Others think that because it’s hard money, the rules don’t apply. Neither of these are true.
The fact is that there are ways to do it correctly and there are rules about how to do them. In other words, there are limitations on what can and can’t be done. The purpose of this post is to clear up some of the confusion in this area.
The most common type of owner occupied hard money loan is the business purpose loan. As you might guess, the purpose of the loan must be to use the money for business purposes but there is a bit more to it than just that.
To qualify as a business purpose loan, the money needs to be used for a business that the borrower has an ownership interest in. This could be a new business being purchased or started, an existing business or a business that used to exist but doesn’t anymore.
An example that you might not think of is to pay off debts that were incurred for the business, like when a business owner uses credit cards to expand their business or to get through rough times.
Fortunately, to qualify as a business purpose loan, not all of the money has to be used for business purposes. The rule is that the primary purpose of the loan has to be for business use, meaning that more than 50% of the loan proceeds has to be used for business.
So if you want to put $100,000 into your business and you also want some money to pay down your credit cards that were used for personal expenses, as long as the amount being put into the business is more than the amount being used for personal expenses, the loan would still be considered a business purpose loan.
A major benefit of the business purpose loan is that the guidelines are pretty simple and easy to understand. There are no specific appraisal requirements other than the lender needing to make sure that the value is sufficient to protect them in the event of default.
Proof of income is generally not required. Proof of assets other than the property being used as collateral is also not normally required. What is required is a clear statement of how the money will be used. It must be written and signed by the borrower.
If you have any questions about how these loans work or if you could qualify, please call or fill out the contact form on our website.
In the next post, I will cover the next type of owner occupied hard money loan, the bridge loan or temporary loan.
I know that marketing is supposed to attract interest and generate customers who will pay for services being offered. I also know that most marketing people seem to push the message that their product is for everyone.
The fact is that most products and services are designed to help a specific group of people. Hard money loans are one of these services. They are designed to help those who cannot get a bank loan, but that isn’t all.
Hard money is ideal when a borrower has bad credit, a problem property or cannot prove their income to the satisfaction of the banks. Before I tell you why it isn’t for everyone, I want to go over a few details on the things is is intended to handle.
Bad credit could mean a long history of late payments or a recent situation of late payments. It could be due to a bankruptcy that was too recent for the banks to work with or the same with a foreclosure or short sale. It could be a single missed payment on a mortgage.
In short, bad credit doesn’t only mean a low credit score. It just means the banks don’t like something about your credit. From the banks’ viewpoint, it could also be no credit or no credit score.
Similarly, there are many different definitions of a problem property. The most obvious one is where the property is in poor condition. Even this has various stages. To a bank, a house with a leaking roof would not be acceptable. They won’t even lend on a house that has broken windows or a water heater that doesn’t have the required double straps.
Of course a home that needs a complete remodel because it is in terrible condition would be a good candidate for hard money. The banks don’t like this type of property but hard money lenders can see the potential in it and, because they lend based on the current value or hold money to be used for the rehab, they know their loan is well secured.
And let’s not forget the “unusual property” that the banks hate. In this category, we have: the manufactured home that needs to be put on a permanent foundation, the geodesic dome (aka dome home), the property with both a regular home and a manufactured home and the home on too many acres. There are others too. If it isn’t a “regular” property, the banks don’t like it.
Finally, we come to the proof of income situation. This one can be very touchy. Self-employed borrowers who make good money may be able to write off enough on their taxes so it doesn’t look like they make enough to qualify for a loan even though they have no problem making payments.
Sometimes, a person has a project that will make a lot of money but until the project is done, they can’t prove they can afford to do it. Banks will run away from these projects but hard money can be an ideal solution.
So why is hard money not for everyone? The very short answer is that if the numbers don’t work, it isn’t a solution.
What I mean by this is that you have to run the numbers and make sure they are affordable and profitable. If they aren’t both of these things, it is not a solution.
Checking for affordability is not quite as simple as it may seem on the surface. The obvious way to check this is to figure out your income and expenses to see if the loan will fit within your budget. But what if it doesn’t while you know the project will result in a good profit?
This is where the creativity of hard money comes into the picture. There are ways of figuring out a solution to this so that you can make it to the end of the project and get the profit you are looking for. For example, having cash reserves to carry you until you get to the point of being able to sell or refinance the property can be very workable.
Moving on to the profitability of a project, there are also different ways of looking at it. The profit can be immediate, such as buying a rental property with a positive cash flow. Or you can see the future profit once a project is done or can be moved to a loan with a lower interest rate.
If a project is not affordable or profitable with a hard money loan, it should not be done with hard money. But before you reject a project or a loan as unworkable, it is smart to have a professional look it over with you to see if a solution can be created. You might be surprised.