Hard Money Rehab Loans

Residential hard money real estate loans are loans that are backed by equity in the property and not the borrower's credit. That being said, to get a residential hard money loan there must be at least 30-35% equity in the deal.

Hard money rehab loans are a species of real estate loans collateralized against the quick-sale value of the property for which the loan is made. Most lenders fund in the first lien position, meaning that in the event of a default, they are the first creditor to receive remuneration. Occasionally, a lender will subordinate to another first lien position loan; this loan is known as a mezzanine loan or second lien.

Lenders who provide real estate hard money loans structure those loans based on a percentage of the quick-sale value of the subject property. This is called the loan-to-value or LTV ratio and typically hovers between 60 and 70% of the market value of the property.

For the purpose of determining a LTV, the word "value" is defined as "today's purchase price." This is the amount a lender could reasonably expect to realize from the sale of the property in the event that the loan defaults and the property must be sold in a one- to four-month timeframe.

This value differs from a market value appraisal, which assumes an arms-length transaction in which neither buyer nor seller is acting under distress.

Below is an example of how a commercial real estate purchase might be structured by a hard money lender:

65% Hard money (Conforming loan)

20% Borrower equity (cash or additional collateralized real estate)

15% Seller carryback loan or other subordinated (mezzanine) loan

Interest rates on hard money rehab loans are typically a lot higher than conventional loans. Often 12-20%.

Also, hard money loans will require points or fees. Watch out for private hard money lenders who require an upfront fee.

One issue with a hard money real estate loan is that it is basically an unregulated industry. Most hard money loans are funded through private hard money lenders. You need to be cautious with what you are signing when doing a hard money loan.

Residential real estate hard money loans can typically be funded pretty quickly. Sometimes residential hard money loans are referred to as hard money fast loans. Regardless of what you call it, hard money loans can be a good answer when you need funded quickly.

The reason hard money loans are often referred to as hard money rehab loans is because typically you must do some rehabbing to the property to qualify for a hard money loan.

For example, just because you can buy a property for 35% below market value doesn't mean you will qualify for a hard money loan. The lender will likely assume that if you can buy the property at that price then that is the value of the property. So they will want to see some improvements being done to increase the value.

This isn't always the case but can sometimes be required.

Hard money loans are often shorter term loans. They can range anywhere from a few months to a few years. Hard money loans work great if you are needing some funds for a quick flip. .

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