How to Get a Hard Money Loan: Interview with Liz Nichols of RE Advantage Capital LLC
Are you curious on how to get a hard money loan? There are many ways to go about this process, but you don’t have to go it alone. A private money broker can help you negotiate the private money landscape as an intermediary. This broker acts as a liaison between borrowers and private money institutions and individuals and does not use their own funds.
Related: Bank Loans for Rental Properties
Today, we discuss hard money lending with Liz Nichols, who is the managing partner at RE Advantage Capital LLC. Her company sources private money to investors. In the video above, Liz gives us a rundown of what a hard money loan is and goes into the steps you need to take in order to get ahold of a hard money loan via a private money broker.
What is a Hard Money Loan Anyway?
A hard money loan is money you borrow that is more expensive than a typical bank loan. Why would you want to do this? Well, if you are someone who has troubles getting a bank loan, this may be your only option. Sometimes you may want to rehab a distressed property that is in too bad of shape. Perhaps you want to buy 5 properties at a time or your debt to income ratio is all out of whack. If the bank says no, hard money lending might say yes!
“Sometimes people, even if they have really good credit, will go to a hard money lender, which basically would be money that would come at a higher percentage rate. It would be usually an interest only loan for anywhere from 3 months to 24 months at between 10% and upwards of 18% sometimes, depending on the property and the level of risk that is assessed in terms of the investor.” – Liz Nichols
Hard money lenders are “niche lenders”, but it’s a rather large niche. In some cases, you can even get what is called “soft money”, which is a higher interest than a bank loan but more reasonable than a typical hard money loan. Some longer term loans may be available for as low as 6.5% to 9.9%, even if you don’t have perfect credit. “If you’re willing to put up with that kind of interest rate over a long period of time or if you simply don’t have a choice because your credit and/or the property do not lend itself to a bank loan, you can get an extended loan with something called soft money,” said Liz.
“They’ll accept many more creative ways for you to get the deal done than a bank typically would,” continues Liz. There are many options for real estate investors that previously didn’t exist. It’s all about the deal though. The key difference between a bank and a hard money lender is that the bank cares about you as an individual, where the hard money lender is more concerned about the asset.
6 Steps to Getting a Hard Money Loan
There are 6 steps to getting a hard money loan. Liz walks us through a typical scenario and stresses that you don’t need to go at this alone, especially if you work with a private money broker:
1) Before Signing a Contract, Make Sure You Have a Good Enough Deal
A broker can help educate you before the contract is signed and review the deal. “This is just one of the value added services of having a broker, incidentally; they’ll kind of help you through the deal,” says Liz. Hard money lenders have criteria that they follow and you will typically need to put 20-35% of your own money in. The lender will want some of your skin in the game, but if the deal is good enough, you may be able to find plenty of hard money lenders to work with you. Liz states that hard money lenders may “accept many more creative ways for you to get the deal done than a bank typically would.”
2) Sign a Contract on a Home and Start Vetting Hard Money Lenders
Once you’ve got the contract, it’s time to start vetting different hard money lenders out there. You typically will need to give the lender 14 to 21 days during the due diligence phase, which is the period of time between your offer being accepted (contract) and the final closing of the property. If you have enough time during this phase, you can usually find 2 or 3 lenders that would be interested in doing the deal and you should know how much money you’ll need to come up with.
3) Once You Have Found Lenders, Get an Appraisal
“Once you’ve got the contract and we’ve found some lenders, you’ll expect most of them will require an appraisal,” says Liz. This is where a hard money lender is similar to a bank. You can get a broker price opinion, which is an estimated value of a real estate property, but finding a hard money lender to accept this is rare. You’ll need enough time and $450 for a typical single-family dwelling appraisal, but prices will vary depending on market and location. The hard money lender, much like a bank, will select this appraisal through a third party.
4) Fill Out an Application
A private money broker will work with you to fill out an application for the hard money loan. “Usually the application is not very tough to do and I can help an individual through that process. They usually either ask for bank statements and/or they will ask for permission to pull a tax transcript,” said Liz. “Again in that way similar to a bank, but they’re not going to be looking at things like debt to income ratios or how many dings you have on your credit report.” This is the nice thing about hard money loans. Credit scores still matter, but as stated before, the deal is what matters the most in hard money lending scenarios. This may be very good news for you if your credit is below 700.
5) Lender Will Start Underwriting Process
The hard money lender will have an underwriter go through the whole process and review your application. You should have a real estate attorney lined up to get involved with the closing, or a title company to work as an escrow. If everything goes smoothly during this step, your hard money loan will be fully approved and it’s time to start closing on the property!
6) Coordinate with Real Estate Attorney or Title Company, Close on Property
Perhaps you have worked with a bank to get a mortgage and recall this step. “It’s a simplified version of what you’d go through with a bank, where they’re much more interested in making sure that you’ve got a good deal and a good property than they are in you particularly as an investor,” says Liz. Your real estate attorney or title company will go with you to the closing table and you’ll look through the HUD-1 closing statement. According to Wikipedia, the HUD-1 statement is a standard form in the United States which is used to itemize services and fees charged to the borrower by the lender or broker. Once everyone signs off on those numbers, you have your investment property. Thanks, hard money lending!
For more information on hard money lending, please email Liz Nichols at email@example.com, call her at (319) 359-0656 or visit RE Advantage Capital LLC’s website at www.REAdvantageCapitalLLC.com!
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[00:00] Jeri: Hello investors. My name is Jeri Frank and I’m CEO of AssetRover. Today I’m here with Liz Nichols, who we first met through the Iowa City Real Estate Meetup Group. She has led this group now for over 5 years and it’s grown to over 180 members. It’s doing quite well. Liz has been leading this and has been a real estate investor herself for the last 12 years with her husband. She has most recently joined a group called RE Advantage Capital, LLC, where she is a managing partner, where she sources private money to investors. Today we’re going to talk about now hard money lending. Hi Liz. Welcome.
[00:41] Liz: Thank you for having me.
[00:43] Jeri: We’re glad to have you here today. What is hard money lending?
[00:47] Liz: That is money that is more expensive than a loan from a bank for sure, but it has a specialized purpose. It has a purpose in life. First of all, there are often investors who can’t get a bank loan. They may not be able to get a bank loan because the property is in too bad of shape to get a loan or because they want to do a loan to buy 3 or 4 or 5 properties at a time and the bank just won’t buy that. Maybe they’ve already got 10 or 15 properties and the bank has said no, your debt to income ratio is now out of whack and I can’t approve any more. Sometimes people even if they have really good credit will go to a hard money lender, which basically would be money that would come at a higher percentage of rate. It would be usually an interest only loan for anywhere from 3 months to 24 months at between 10% and upwards of 18% sometimes, depending on the property and the level of risk that is assessed in terms of the investor. There are many people who don’t have 700 credit scores, can’t get a bank loan or, as I said, the property is not such that a bank is going to lend on that because it needs too much repair. Hard money lenders really zero in on that market. They’re looking at investors who have good deals. They maybe are getting it at 65 or 70% of after repair value or better and they can’t get a bank loan, but they are going to maybe flip the property inside of 6 months. A hard money lender is just ideal for that kind of investor, who just needs short term cash but can’t afford to bring all the money to the table to get a deal done.
[03:18] Jeri: They’re really kind of a niche lender?
[03:20] Liz: Yes, but it’s a large niche. We’re finding there are even getting to be maybe not hard money, but something in between the bank and hard money, something called soft money. You can get longer term loans even if you don’t have perfect credit and even some will do it for somebody’s residence in a 6.5 to a 9.9% interest rate. If you’re willing to put up with that kind of interest rate over a long period of time or if you simply don’t have a choice because your credit and/or the property do not lend itself to a bank loan, you can get an extended loan with something called soft money. Those are the two areas that I’m dealing with. I happen to be dealing specifically with investors, that is people that are buying non-owner occupied property, and they’re usually using it for a short period of time. It used to be that really there was not a non-bank market for people who wanted to be landlords. Now there is. If you’ve got a good enough deal so that you can get it to cash flow and you don’t have totally in the tank credit, usually those lenders will require you to have a 640 credit or better. A lot of people are out there buying property that have credit scores in that 640 to 690 range and can’t go to a bank to get the money to save their life.
[05:19] Jeri: That’s great that there are those options.
[05:21] Liz: Yeah, there are those options now. You just have to make sure you get a good deal, because those hard money lenders are looking much more at the asset and much less at the individual. They still want to make sure you have some skin in the game, which means that maybe you’re putting anywhere from 20 to 35% in, but they’re willing to look at creative ways for you to get that 20 to 35%. You might be able to take a property you already have free and clear and do what is called cross-collateralizing so that you end up with another mortgage on that piece of property, but only until you’ve paid off the loan for maybe the fix and flip you’re working on. That’s a no money down strategy. You can often come with no money out-of-pocket, even with a hard money loan, if you’ve got another property. Then you can use that same property repeatedly to cross-collateralize your fix and flip deals. That is a way an investor might … you know, it’s advantageous to have some rental property that you have free and clear. Then if you want to do some fix and flip work, you can often do it with no money out-of-pocket because you’ve got another property that you’re using as collateral. If you don’t have that, you can find a partner who has the money. You can borrow it. Usually banks frown on that, but if your great-aunt is willing to give you the down payment money, it can get into your bank account that very same month that you close and the hard money lenders aren’t going to care, as long as the money is there. They’ll accept many more creative ways for you to get the deal done than a bank typically would.
[07:32] Jeri: Very interesting. Why don’t you walk us through a step-by-step process when someone is going to use a hard money lender?
[07:40] Liz: Okay. I know we talked earlier about what normally happens and you’ve got a bank loan and maybe you’ve gone through a realtor and you’ve got a property that you want to use as a rental. Usually the realtor is going to say you need a pre-approval letter. I can get pre-approval letters too, but it doesn’t have quite the same meaning as going to the bank and having them check yes, indeed, you’ve got X amount in your bank account and your credit score is something we can lend on, so yes, this person is pre-approved up to X amount of money. Instead, a pre-approval from a hard money lender is really going to mean that hard money lender has X millions of dollars to loan and provided the deal pans out the way it’s been presented preliminarily to them, they’ll be able to lend to you. It’s contingent on finalizing the process, but you can get a pre-approval.
[08:50] Liz: What you really need to start with a hard money lender is a contract in hand. I often help people, educate them before they’ve actually signed a contract to make sure it’s a good enough deal. This is just one of the value added services of having a broker, incidentally; they’ll kind of help you through the deal. I’ll look up on various sites that mortgage lenders look at to determine valuation, and they’re very often very accurate, so I can tell even before someone signs a contract whether it’s a deal that’s going to fly with the hard money lender. If not, you know how much out-of-pocket they’re likely to have to spend, so before they’ve actually put the money down I can usually tell them whether the deal is going to fly or not.
[09:50] Liz: Then we’ll start actually vetting different hard money lenders once they have a contract. If you can give me as a broker or really any hard money lender 14 to 21 days before you need to close, we can usually find 2 or 3 lenders that would be interested in doing the deal and you’ll have a pretty good idea right up front of what you’re going to have to have to come to the table with for the deal. Once you’ve got the contract and we’ve found some lenders, you’ll expect most of them will require an appraisal. There’s really no way of getting around it. There are very few lenders that will just allow you to hand over a broker price opinion and get a property that way. In that respect, hard money lenders are similar to banks. You have to build in enough time in most cases for that appraisal. That is usually the only money out-of-pocket that you will spend before you get to the closing table, about $450 for a typical single-family dwelling appraisal. It will be a third party appraisal that will be selected through a service that the lender has, again very much like with a bank.
[11:23] Liz: Then we’ll go through and do an application. Usually the application is not very tough to do and I can help an individual through that process. They usually either ask for bank statements and/or they will ask for permission to pull a tax transcript. Again in that way similar to a bank, but they’re not going to be looking at things like debt to income ratios or how many dings you have on your credit report. They’re usually using the credit report that they will also be pulling to determine the interest rate. The better your credit score, the lower risk that they’ll see you as, so you might be able to get hard money at 10 to 12% if you have 700 or above credit. More typically for people who have lower credit scores, you’ll be in the 13 to 15% range for a typical fix and flip type loan. The lender then has an underwriter who will vet the whole process. They’ll take the application and the documentation and the underwriter will coordinate it with your closing attorney or closing title company. Then it will be very much like any other process of buying property, where you go to the closing table after you’ve looked through a HUD-1 closing statement and everybody has to sign off that those numbers are accurate. That’s really pretty much the process. It’s a simplified version of what you’d go through with a bank, where they’re much more interested in making sure that you’ve got a good deal and a good property than they are in you particularly as an investor.
[13:48] Jeri: For that whole process from beginning to end, are we looking at a 30 day time frame?
[13:56] Liz: Yeah. You can get through it usually in less than 30 days, but most brokers will feel most comfortable if you can at least give them 21 days. I do work with a few local investors who are private lenders and for particularly well qualified investors, people who have done a lot of deals and know exactly what they’re doing, I have actually been able to get loans closed in less than 7 days with the private lenders, with very little paperwork and with a broker price opinion instead of an appraisal. It is possible, but I’m generally not going to be recommending someone who is a brand new investor.