What You Need to Know About Hard Money Construction Lenders

A hard money construction lender is an essential part of the real estate development industry as a source of funding because the loans they offer allow businesses to quickly get a loan, get work done, turn a profit, and pay off the loan in a short amount of time. Then it’s off to the next job.

Why Would Someone Use a Hard Money Construction Lender?

While not every developer and investor chooses to use them, hard money loans provide specific advantages in certain scenarios. Here are a few reasons why someone would choose a hard money construction lender.

  • Speed: Traditional lenders, like banks, can take weeks or even months to approve a loan due to extensive due diligence. Hard money construction lenders, on the other hand, prioritize the property’s value and the borrower’s equity in the project. This means that borrowers can get approved and access funds much more quickly, often within days.
  • Flexibility: Hard money construction lenders are typically more adaptable than traditional banks. Their loan terms and conditions can be tailored to suit the unique needs of each project, offering a level of customization that standard loans do not.
  • Short-Term Needs: These loans are perfect for projects with a clear exit strategy, like renovations or developments that will be sold quickly upon completion. Given that hard money loans often have higher interest rates, they’re best suited for projects that don’t require long-term financing.
  • High-Risk Projects: Hard money lenders are generally more willing to take on projects that traditional banks deem too risky. This makes them an ideal choice for ambitious projects that don’t fit the conservative molds of mainstream financing.
  • Credit Challenges: If a developer or investor has blemishes on their credit history, they might find it challenging to secure a loan from conventional sources. Hard money lenders tend to focus more on the project’s viability and the property’s value than a borrower’s credit score.
  • Leveraging More Projects: For seasoned real estate professionals, hard money can be a way to work on multiple projects simultaneously. They can use hard money for one project while their capital is tied up in another, allowing for continuous work without waiting for traditional financing.
  • Gap Financing: Sometimes, there might be a gap in funding that needs to be filled quickly. Hard money can act as a bridge, allowing a project to continue unabated until another, more permanent source of financing is secured.
  • Lending Expertise: Hard money lenders often have a deep understanding of the real estate market and construction industry. Their expertise can be invaluable, offering borrowers guidance and insight throughout the duration of the project. Contact a hard money construction lender to get their insight and expertise now!
  • Less Bureaucracy: With fewer hoops to jump through and a streamlined approval process, hard money loans often have a more straightforward application process, which is particularly beneficial when time is of the essence.

What’s the Most a Lender Can Approve a Hard Money Loan For?

The amount of money your hard money construction lender will approve you for varies greatly depending on quite a few variables. Most hard money loans start at a minimum of $50k to $75k and a maximum of about $5m. When it comes to the highest amount one can borrow, several factors come into play.

  • Loan-to-Value (LTV) and After-Repair-Value (ARV): The most significant determinant of how much you can borrow with a hard money loan is typically the loan-to-value (LTV) ratio or the after-repair-value (ARV) ratio. Lenders will usually finance between 50% to 70% of the property’s current value (LTV) or 65% to 75% of its expected value after repairs (ARV).
  • Property Type: The nature of the property has an influence on loan amounts. For instance, residential properties might have different lending caps compared to commercial properties or raw land.
  • Lender’s Individual Parameters: Hard money lenders operate independently, with each setting its criteria. Some might cap loans at a few hundred thousand dollars, while others may offer loans into the tens of millions, especially if dealing with large-scale commercial properties or development projects.
  • Geographic Location: Properties located in high-value areas, such as major metropolitan cities, may be eligible for larger loans due to their inherently higher property values. Conversely, properties in more rural or less economically active areas might command smaller loan amounts.
  • Borrower’s Equity: The more equity a borrower has in a project, the more comfortable a lender will feel offering a larger loan. High equity signifies that the borrower has more skin in the game, reducing the hard money construction lender’s risk.
  • Project Potential: For rehab or fix-and-flip projects, the potential profitability and the borrower’s track record can influence the loan amount. A project that stands to be highly profitable might secure larger funding, especially if spearheaded by an investor with a proven history of successful endeavors.
  • Regulations: Some states or regions may have regulations or guidelines that can influence the maximum allowable loan amounts for hard money or other alternative lending practices.
  • Duration of the Loan: Shorter-term loans might have different maxima than longer-term hard money loans, depending on the lender’s strategies and preferences.

Why Can Hard Money Lenders Approve Loans More Quickly?

Unlike other conventional types of loans, a hard money loan generally takes less time to approve. When applying for a hard money loan, there is usually very little back and forth between the lender and borrower and there are several factors why.

  • Asset-Based Lending: Unlike traditional lenders who focus heavily on the borrower’s creditworthiness, hard money lenders primarily base their loans on the value of the property in question. By emphasizing the collateral’s value, they can make faster lending decisions without wading through a borrower’s extensive financial history.
  • Simplified Underwriting Process: The underwriting process for hard money loans is typically much more streamlined. Fewer checks and less documentation mean decisions are reached more quickly.
  • Focused Expertise: Many hard money lenders specialize in specific types of real estate investments, such as fix-and-flips or construction loans. Their focused expertise allows for a quicker assessment of the property and project feasibility, accelerating the approval process.
  • Relationship-Driven: The hard money lending world is often more personal and relationship-driven. Established trust between a borrower and a hard money lender can streamline the loan process, sometimes reducing the need for extensive due diligence in repeat transactions.
  • Direct Communication: Borrowers often communicate directly with the decision-makers when dealing with hard money lenders. This direct line of communication cuts down on potential delays that can arise when messages are filtered through various departments or intermediaries.
  • Market Adaptability: Hard money lenders are often more attuned to the real estate market’s nuances and can adapt their processes to meet their demands. When the market demands speed, these lenders are well-equipped to deliver.
  • Pre-established Loan Terms: Many hard money lenders have set loan products or terms that they offer. This uniformity can expedite the approval process, as there’s less negotiation and customization needed for each deal.

Do Hard Money Lenders Require a Down Payment?

Most hard money construction lenders will require a down payment as a standard practice. Borrowers should be prepared to contribute a portion of the project’s costs upfront. Most real estate hard money lenders do require a down payment though it can range in size from as low as 10% to as high as 30%.

That said, the actual amount may depend on your track record in the real estate industry and your relationship with your hard money lender. For that reason, it’s always advisable to consult directly with potential lenders to understand their specific down payment requirements and any potential flexibility based on individual circumstances.

How Do I Find a Hard Money Construction Lender?

When you’re ready to make the investment, here are some pointers to help you find the right hard money lender for your investment needs:

  • Before diving in, clarify what you’re looking for. Knowing your needs will help you identify lenders who specialize in your specific type of project.
  • Start by looking within your local network of real estate investment groups, real estate agents, and mortgage brokers.
  • If you can’t find someone in your local network, several online platforms list hard money lenders by state or specialization.
  • Once you have a list of potential hard money construction lenders, be sure to check their qualifications and credibility.
  • Once you’ve received a loan offer, meticulously review the terms.
  • Consider seeking legal counsel to review loan agreements.

For a more detailed breakdown of this process, read our article about finding a hard money lender near you.

If you’re ready to take out your first hard money loan, please get in touch with us, and we’ll be more than glad to accommodate you.

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