Hard Money Loans FAQ

Hard money loans are a specific type of asset-based financing secured by real estate collateral. These loans are typically provided by private investors or companies, making them a popular option for those who need fast funding. For example, RCN Capital offers hard money loans backed by non-owner occupied residential real estate. This FAQ covers common questions about hard money loans, including details on interest rates, loan terms, Loan-to-Value ratios, and credit requirements, all from a wholesale lending perspective.

What Are Hard Money Loans?

Hard money loans are asset-based loans that use real estate as collateral rather than relying primarily on the borrower's credit history. They’re often issued by private lenders or companies who can provide faster funding than traditional banks. Because these loans are secured by the property, lenders are more willing to approve them quickly, even if the borrower's credit score isn’t perfect. This speed and flexibility make hard money loans an ideal option for many real estate transactions.

RCN Capital, for instance, structures its hard money loans to fund projects such as fix-and-flip properties or short-term bridge financing for rental conversions. The emphasis is on the property’s value, so if a property is deemed a sound investment, the loan is often approved in a matter of days.

Who Uses Hard Money Loans?

Hard money loans are commonly used by a variety of real estate professionals. Typically, fix-and-flippers, developers, and buy-and-hold investors benefit from the speed and flexibility of these loans. Their fast turnaround allows borrowers to seize time-sensitive opportunities, such as purchasing properties with multiple competing offers, and close quickly when traditional bank financing might take 30 to 50 days.

From a wholesale lending perspective, hard money loans are invaluable because they enable brokers and originators to quickly secure funding for transactions, facilitating faster property turnarounds. This quick funding is crucial when working in competitive markets, where every day counts.

What Is the Interest Rate?

Interest rates on hard money loans can vary based on the lender and the property’s location. Typically, these rates range from 8% to 18%, reflecting the higher risk associated with short-term, asset-based lending. In competitive markets like California, lenders may offer more attractive rates due to higher property values and stronger market conditions.

For example, RCN Capital’s rates might start at 8.99% for borrowers with a strong track record and then increase up to 12% for first-time borrowers. The wholesale lending approach often allows lenders to be flexible, adjusting rates based on the overall risk profile of the project and the investor’s exit strategy.

How Long Is the Loan Term?

Hard money loans are generally short-term financing tools. Most hard money loans have terms ranging from 6 to 18 months, though some lenders offer longer-term solutions (up to 3 years or more) for unique situations. The shorter loan term is designed to support quick-turnaround projects such as fix-and-flips, where investors acquire, renovate, and sell properties in a matter of months.

For borrowers who plan to use the loan as a bridge, such as acquiring a property quickly and then refinancing with a traditional lender, the short-term nature of hard money loans is a key benefit. Wholesale lenders, in particular, design these loans to be flexible enough to accommodate different exit strategies, whether the goal is to flip the property or hold it for long-term rental income.

What Are Typical Loan-to-Value Ratios?

The Loan-to-Value (LTV) ratio is a critical metric for hard money loans, representing the amount a lender is willing to provide compared to the value of the property. Most hard money lenders offer loans that are 65% to 75% of the property’s current market value. Some lenders, like RCN Capital, base their lending on the After-Repair Value (ARV) of the property, i.e., the appraised value once renovations are completed.

Under an ARV-based program, a lender might offer between 55% and 70% of the ARV. RCN Capital, for example, can fund up to 85% of the purchase price and 100% of renovation costs, provided that the total funding does not exceed 75% of the ARV. These ratios are designed to protect the lender while giving borrowers enough capital to cover both the acquisition and the necessary repairs.

Are There Costs Associated with Hard Money Loans?

Yes, there are costs associated with hard money loans, and borrowers should be prepared for these additional expenses. Common fees include:

• Title Policy and Insurance: The borrower typically pays for the title policy and any necessary insurance.
• Appraisal Fees: An appraisal is required to determine the property’s current market value or ARV.
• Third-Party Fees: Borrowers may also need to cover fees for inspections or project feasibility studies.

While some hard money lenders may charge an application fee, RCN Capital does not require any upfront fees during the pre-approval and approval process. However, the borrower is responsible for all third-party fees. Understanding these costs in advance helps ensure that your project remains financially viable.

How Much Does the Credit Score Really Matter?

Although hard money lenders do run credit checks, the primary focus is on the value of the property and the exit strategy, rather than solely on the borrower’s credit score. Most lenders have flexible credit requirements, but they do assess the borrower’s ability to repay the loan.

For example, RCN Capital’s After Repair Value loan program and its commercial loan program have a minimum FICO requirement of 600. Other loan programs may not have a set minimum score; instead, the borrower’s credit history is reviewed to determine if any patterns of poor financial management exist. Additionally, the credit score is evaluated based on the investment’s exit strategy. If the borrower plans to hold the property long-term, greater emphasis is placed on the FICO score. In contrast, for fix-and-flip projects, the focus is more on the potential profit from the property rather than on credit history.

Additional Considerations in Hard Money Lending

Beyond the basics, there are other aspects of hard money loans that borrowers should consider:

• Exit Strategy: Lenders want to know how you plan to repay the loan. Whether you intend to flip the property quickly or refinance with a traditional mortgage, a clear exit strategy is essential.
• Property Condition: Since hard money loans are asset-based, the condition of the property is paramount. Lenders will scrutinize the property to determine its current and potential value.
• Market Conditions: Local market trends can influence the terms of the loan. In high-demand areas, lenders might offer more competitive rates and better terms.
• Flexibility: Hard money loans are designed to be flexible, allowing borrowers to cover a variety of scenarios. This flexibility is particularly beneficial when traditional financing isn’t an option due to time constraints or property condition.

The Wholesale Lending Perspective on Hard Money Loans

As a lending professional, your goal is to provide fast, flexible financing that can adapt to a wide range of real estate investment scenarios. Hard money lenders work closely with brokers and loan originators to offer products that cater to both short-term projects and long-term investments. This collaborative approach ensures that funding is available quickly and with terms that match the specific needs of the project.

Hard money loans offer a unique solution for real estate financing by focusing on the value of the property rather than the borrower's credit history. With fast approval times, flexible terms, and a focus on asset-based lending, these loans are ideal for projects requiring quick capital, such as fix-and-flips, bridge financing, or short-term investments.

RCN Capital

At RCN Capital, we specialize in providing financing solutions for real estate professionals, brokers, and investors. We offer a range of loan products including short-term fix-and-flip loans, long-term rental financing, and new construction loans. With flexible loan terms and competitive rates, RCN Capital is committed to helping your clients find success with their real estate investments. Connect with us today to learn more about how we can help your clients achieve their investment goals.