Hard Money Loans
Experts disagree on what how “hard money” got its name. Some say it refers to the fact that it is much more expensive than traditional financing and has “harder” terms. Others say it’s because it finances houses that are “hard” for conventional lenders to finance. Still others say the term describes the collateral for the loan: a hard asset, which in this case is the real estate.
Whatever the term’s origins, hard money loans usually have terms of less than one year and interest rates of 12% to 18%, plus two to five points. A point is equal to 1% of the loan amount, so if you were borrowing $112,000 and the lender charged two points, you would pay 2% of $112,000, or $2,240. Rather than pay points at closing, as you would with a conventional mortgage, with a hard money loan you may not have to pay points until the home sells – the one soft thing about this hard money.
Hard money lenders base the amount you can borrow on the home’s after-renovation value (ARV). If a home costs $80,000 but the ARV is $160,000 and you can borrow up to 70% of ARV, then you can borrow $112,000. After paying the $80,000 purchase price, you’ll have $32,000 left for closing costs (though you might be able to negotiate for the home’s seller to pay them), lender fees, rehab, carrying costs and selling expenses such as staging, marketing and real estate agent commissions. If you can stick to that budget, you won’t need any money out of pocket to flip the home.