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Tuesday, April 2, 2019

DIFFERENCES BETWEEN CONVENTIONAL MORTGAGES AND HARD MONEY LOANS

If you are seeking to invest in real estate and require funding, you have probably figured out you have two options—Texas Hard Money Loans or conventional mortgages.

The majority of people understand what a conventional mortgage is, but fewer understand what a hard money loan looks like. And, even though you may be familiar with a conventional mortgage, you may not truly understand everything that goes into financing from your bank. In this article we will break down the common differences between the two types of financing.

THE INS AND OUTS OF FINANCING

A difference that seems to stand out more than others is the time frame between the two types of financing and how long each of them take to close. With a conventional mortgage it typically takes around 45 days. The fastest you can close with a conventional mortgage is 30 days—and occasionally up to 90 days. There are many strict rules in place when it comes to the underwriting of a conventional mortgage along with a lot of red tape. With a hard money loan you can close within a week or two. The underwriting of Texas Hard Money Loans are less stringent and more flexible.

The funding sources of conventional mortgages and Texas Hard Money Loans differ, as well. Conventional mortgages are funded by lenders who sell their loans to larger banks and other investors. The money for Texas Hard Money Loans comes from private investors, investment funds and lines of credit. Texas Hard Money Loans are not sold to anyone else as conventional mortgages commonly are. These loans remain with the original lender.

Now, the money-interest rates. Yes, generally Texas Hard Money Loans have a higher interest rate than conventional mortgages. There is a reason behind the madness, though. Arizona Hard Money Lenders are loaning money for much shorter periods of time unlike banks who collect large amounts of smaller interest payments over time. Yes! That is the only difference when it comes to interest rates. You may have a hard money loan at an interest rate of 9%, but it’s only for six months—while your conventional mortgage sits at 4% and the bank collects that interest for 30 years.

Bank lenders offering conventional mortgages are lending them on residential properties that will be used as the borrower's home. The banks are looking at the borrower's credit and condition of the property. If a property needs rehabbed in any shape or form they will generally not be approved for a conventional mortgage. Arizona Hard Money Lenders, on the other hand, lend to both residential and commercial properties, but usually don’t lend on primary residences. Texas Hard Money Loans are set up for investors looking to fix and flip properties.

If you are looking for a hard money lender we are here to answer your questions.

Lenders are as unique as borrowers are. We would love to share our knowledge with you and find out if we can work together. Please contact us at level4funding.com.

Dennis Dahlber Broker Ri CEO Level 4 Funding LLC Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com
Dennis Dahlberg Broker/RI/CEO

About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

BENEFITS OF HARD MONEY LOANS

Why choose a hard money loan when conventional loan interest rates are lower? That’s a good question.

Hard money and Arizona Hard Money Lenders play a unique role in the real estate investing world. There are numerous benefits to working with a hard money lender.

UNDERSTANDING HARD MONEY

When a borrower applies for a conventional loan the very first thing a lender does in run your credit history and check how many loans you have on your credit. If a borrower’s credit isn’t stellar and they have existing loans that typically puts a halt to the application process.

When a borrower applies for a hard money loan the priority does not weigh on the borrower’s credit score or the amount of active loans they have. Yes, a Arizona hard money lender generally does look at a borrower’s credit—however, a low FICO score is rarely a red light on the road to approval. Arizona Hard Money Lenders aren’t concerned by the borrower’s number of loans that are active—they are focused on the value of the property because that is the hard asset that backs the loan—that is the collateral.

Another major component to financing a project is renovation costs. Conventional lenders don’t typically finance renovations. Conventional loan underwriting is very rigid with many stipulations. On the other hand, a hard money lender will put out draws to finance the rehab of the property.

There are countless benefits to working with a Arizona Hard money lender.

The benefits of hard money lending is not only that the focus is shifted from a borrower’s financial situation to their assets and that they will use property as collateral while financing the renovations. Arizona Hard Money Lenders generally do not impose early payment penalties, as well. That can be a life saver to an investor who quickly rehabs and sells the property. Hard money underwriting is more lenient which speeds up closing dates. This is important because it doesn’t matter how rich you are or how great your credit is—the process of getting a conventional loan is long, tedious and a general pain. Using a hard money lender, a borrower can close their deal in less than two weeks—and in the real estate world quick closes are everything.

GET A ARIZONA CONSTRUCTION LOAN USING HARD MONEY

A Arizona Construction Loan can also be called spec home financing. These are loans that are given to investors who are going to build a property.

Most banks are not comfortable lending on a property that is “speculative”—meaning the building of the property is a plan, but there is no property to speak of yet. And, the investors are building to sell for a profit.

Maybe you already have the land the property will be built upon—now you have to get the financing that will allow you to actually build the property. If a bank isn’t going to approve you for financing, who is?

HARD MONEY LOANS FOR SPEC HOMES

After you have done all your planning and gotten all your permits in order, you are what is called “shovel ready.” You are ready to start breaking the ground and building. This is where most Arizona Hard Money Lenders are ready to get involved in the project. All plans need to be approved by the city you are building in—the zoning must be handled. A hard money lender does not want to get involved in a mess. They want to see proof that the investor is authorized to build before they approve a Arizona Construction Loan.

Arizona Hard Money Lenders requirements are a little different than banks when applying for a conventional loan. Banks require a large amount of various documents such as proof of employment—typically from the last three years, proof of all income, a breakdown of your assets, W2s from the last several years and so on. Hard money requirements are a little different in the hard money spec loan department. Arizona Hard Money Lenders aren’t seeking a 750 credit score and are more lenient on job history. They will look at tax returns and bank statements. However, they look at the overall project versus focusing so much on your income and credit. These Arizona Hard Money Lenders focus on specialized projects. It helps to have experience on your side—however, the project and the profit that is projected is what Arizona Hard Money Lenders are looking at.

Knowing how the world of private money investment is crucial before jumping into a project that requires funding.

First, have all the construction plans approved. You must have a construction budget. Many lenders do due diligence and have a third party construction management company perform a budget review—to make sure the budget is in line with realistic costs. Lenders may also conduct a future value appraisal that is based on the plans of the property. Expect that lenders will finance 65% of the future value of the property.

Monday, April 1, 2019

WHAT IS HARD MONEY?

Hard money in Arizona and soft money can be used to describe coins and paper money and money used in political campaigns. However, it can also have to do with loans.

A hard money loan is a specific asset-based loan through which the borrower receives funds that are secured by the value of real estate. Texas Hard Money Loans are typically issued by Arizona Hard Money Lenders or companies. Anything that refers. To “hard” refers to something tangible—in this case the tangible item is the property.

Many people have a negative connotation with the phrase “hard money.” They can’t seem to get past the higher interest rate. You have to realize that although Texas Hard Money Loans do have a higher interest rate, these are short-term loans. It is very possible that these loans may only be two to three months. So, it is very feasible that you may only pay a few hundred dollars in interest.

BENEFITS OF HARD MONEY

Arizona Hard Money Lenders are generally lending money on properties that require repairs. Other lenders, such as a bank, won’t lend money for these types of properties.

The money is much faster in regard to a hard money loan. A bank can easily take 60 to 90 days to close on a loan—whereas, a hard money loan typically closes in less than two weeks. All a lender really needs is an appraisal and a repair list—viola, it can close and you can claim the title.

Real estate investors who are working volume use hard money, because there is literally no other way to buy multiple properties to rehab. Generally lenders will lend 70% of ARV (after repair value). What that means is if a property costs $70,000, but will appraise for $125,000 after repairs are made—the hard money lender will lend 70% of $125,000—which equals $87,500 on a $70,000 property. This can fund the acquisition and repairs, as well.

Arizona Hard Money Lenders will also lend more the repairs if necessary. However, you won’t receive a check for $40,000 if you have figured out that is the amount of money you will need to rehab the property. Instead, Arizona Hard Money Lenders use “draws.” A draw is the money that will be loaned to the borrower for repairs once an estimate has been given.

Using a hard money lender can allow a borrower to not come out of pocket at all if the price is right on the property.

Although, an investor can find a project that they do not have to come out of pocket a penny—that does require finding that golden deal. There are lenders that will loan 90% of the ARV—and occasionally, you can find funding for even more. However, when looking at properties keep your expectations at 70% ARV. And, remember these are short-term loans that also typically have no early payment penalty. It is quite possible, when all is said and done, the only money you will use out of pocket is your payment on interest.

HOW PRIVATE MONEY LOANS ARE STRUCTURED

There is structure to how private money loans are broken down. This concerns your money and it is wise to understand exactly how the private money loan is broken down.

Sometimes when a borrower doesn’t have the money that is required for upfront fees the money can be wrapped into the total loan amount. The easiest way to understand this is to break it down. Let’s look at an example.

EXAMPLE OF A PRIVATE MONEY LOAN

John has decided to get into the real estate game. He has been researching fix and flips and watching a lot of HGTV. John has even found the perfect property to rehab. But, John has no money. He turns to a private money lender.

John found a house with a purchase price of $50,000—this includes the closing costs. The closing costs include transfer tax, title insurance and closing fees. However, then there are some fees that John has to pay upfront—these are fees that can’t be paid at the end of the deal.

Along with the purchase price, John also has a $600 bird dog fee. A bird dog is an investing term that refers to someone who spends their time locating properties with substantial investment potential. Usually, investors use bird dogs to increase the area in where they are looking for property. John has a $500 insurance bill that was required to be paid upfront, as well. He also has Self Directed IRA fees (SDIRA). These are fees that an investor can potentially get charged. It is not the lender’s responsibility to pay money while they are lending. Therefore, it becomes the borrower’s responsibility. John has a $400 SDIRA fee that he needed to reimburse the investor for. He also has to pay $650 in loan points.

All in all John now has $2,150 in fees that need to be paid upfront before he can get his $50,000 loan for his property. What can he do? John simply borrows the fees, as well. Instead of $50,000, he is now at $52,150. However, John is not finished. He also has rehab costs. Rehab funds are not given all at once. These are called “draws.” An investor doesn’t just give all the rehab costs to the borrower. Instead, they are given bit by bit as projects progress. The investor will need proof that these repairs are needed and completed. So, John has $20,000 in rehab draws. In total John will borrow $72,150. The ARV on this property was $100,000. John’s lender financed 100%, so John had no out of money expenses. After interest rates and so on, John profited close to $25,000 with no money down.

It is important to understand where your money goes when dealing with private money loans.

Make sure you are dealing with a lender that explains everything to you. Have them sit down and show you where every penny will go. Not knowing the structure of your private money loan is you walking blindly into a real estate deal.

WHERE CAN YOU FIND PRIVATE MONEY LENDERS

You’ve found the property you want to rehab. Now, where do you find the investors to give you the money?

You’ve got your ducks in a row, but the final and most important part of the deal is finding an investor to loan you the money to fix and flip this property. There are three key areas where you can find private money lenders.

THE THREE PLACES TO FIND PRIVATE MONEY

The first place you can look for money is your own personal network. To most this is a pretty obvious place to begin your search for financial backing—at the same time people are uncomfortable with this scenario. Usually, this feeling comes from embarrassment. You have just decided to enter the real estate game and you may not feel too confident—that’s where the embarrassment comes in. It’s no different than if you were an attorney and out of nowhere you decide to quit the world of law and become a poet. Yes, people would probably feel a little shocked in the decision you made—they will wonder why you chose to quit a career you excelled at to become a poet. Usually when you are honest and vulnerable people will react in a positive manner. Use your contacts and speak with your friends and family to see if they are interested in being a part of your new career. They might—and they might not.

Another place you can find private money lenders is at local real estate functions. How do you find one of these meetings? The easiest way is to go to meetup.com and search real estate investing meetings. Every city has these meetings—all across the county. This is where you will find others who are doing the same thing as you. You will meet real estate agents, fix and flippers and private money lenders.

The last place—and probably the most effective way to find private money lenders— is finding a local hard money lender. Arizona Hard Money Lenders are private money lenders— the difference is, that is all they do. These investors work like banks without all the red tape and waiting. Arizona Hard Money Lenders can be found through a simple Google search. Another great way to find Arizona Hard Money Lenders is through LinkedIn. Find some lenders, meet with them and get to know them. These lenders all have a specific niche. If you are a fix and flipper—make sure the lender you find works with fix and flips. Check out their website. Do they look professional? Find out about their history. Do your research.

There are three main ways to find private money and all of them can work.

Reach out to your family. Maybe some of them want to be a part of your real estate journey. Mix and mingle at local real estate functions—find others that work in the real estate profession. You never know who you will meet. And, finally there is always the rock solid choice—research local Arizona Hard Money Lenders.