Hard Money Loans: Financing House Flipping
A hard money loan is a short-term loan secured by real estate property.
What is a hard money loan and who is it for?
A hard loan (hard money loan) is a short-term loan secured by real estate property.
Because hard money loans are funded by private investors, as opposed to traditional banks, they are often referred to as ‘private money loans.' Hard money loans are based predominantly on the value of real estate investment property, versus a borrower's credit score or financial history. The loan amount is determined by the loan-to-value ratio (LTV), or the ratio of loan amount divided by the value of the property used as a collateral. Even though hard money loans are faster and easier to get than conventional loans, borrowers still need to go through the underwriting process and qualify for specific terms.
Hard money loans, also known as bridge loans, are often used by property investors who need quick financing for their house fix and flip projects. These loans usually have a 6-12-months term and typically cannot be extended to more than a five-year term. Monthly payments are in the form of either interest-only or interest and some principal. The terms and requirements vary from lender to lender and are often based on a real estate investor's experience and property type. At Kiavi, for example, we offer 12-months residential bridge loans with terms based on a property investor's experience level.
Why use a hard money loan?
Here are a few instances when a hard money loan is a great house flipping financing option, and an alternative to traditional financing options.
- You have a real estate investment deal in hand and don't have time to go through a lengthy and cumbersome bank loan process. At Kiavi, it can take as little as five days to get approved for a bridge loan.
- Your credit score is not high enough and/or your income history doesn't meet bank or other traditional lender requirements.
- You don't have enough cash or access to private financing from family or friends.
- You want to fix and flip properties and need a guaranteed quick access to financing. Unlike traditional lenders, hard money lenders, like Kiavi, will work with you to find the best-matched loan program for your project and will offer more benefits as you do more deals with them.
You don't have enough capital to cover the rehab costs of the property you want to flip. Kiavi, for example, covers up to 100% of rehab costs via holdback.
What are hard money loan requirements?
As mentioned earlier, hard money lenders are mainly concerned with the value of property that serves as a collateral. But, ultimately, your terms will depend on the hard money lender you choose to work with and your unique circumstances. Here's a list of typical requirements or qualifications.
- Geographic location. Most hard money lenders operate locally or only in certain regions. Kiavi works with property investors in 25 states.
- Experience, or number of homes you have flipped. Your initial rate may be on the high end when you are first starting out. However, as you gain experience in the business, your money lender will offer lower rates. Typically, the more homes you flip and the more loans you repay successfully, the better the interest rate you will receive. At Kiavi, we look at the number of houses flipped in two years prior to applying for a loan. We offer four different tiers, ranging from first-time investors up to those who have flipped more than 10 properties in the last several years.
- Property type (single family residence (SFR), condo, multi-family units, etc.).
- Intent and property documentation, including scope of work and insurance.
How do hard money loans work?
Like traditional loans, hard money loans for real estate investors have an underwriting process. However, the underwriting process is often much quicker. Since the lender is more interested in property value than your finances, it doesn't take long to approve a loan. In fact, many loans are approved in just a few days.
Once you are pre-approved and have submitted the information on the property you want to purchase, the hard money lender will order an appraisal on it. If the property meets the lender's criteria and you have documentation and insurance on the property, it will move to closing and you will receive the money to purchase the property.
How to find a hard money lender?
Tap into your network to find a hard money lender, ask other property investors for recommendations, and do your own research online. You can find more information on websites like BiggerPockets' Hard Money Lender Directory or FitSmallBusiness' Best Hard Money Lenders to find more information about hard money lenders that lend in your area. You can also check out Kiavi's hard money program — we are the largest hard money lender in the country and have funded more than 10,000 deals. And, there's always Google! Just make sure you ask around, read reviews, and get all the key information from a hard money lender before you apply for a loan.
While the interest rate and amount of the loan are both important factors, you should also look for a lender with a solid track record and reputation. Things to consider include:
- What are the origination fees?
- Does the lender provide full transparency? Are there any hidden fees?
- Will the lender cover rehab costs?
- How much of the LTV will the lender allow you to borrow?
- Is there a dedicated account manager to help you through the process?
- What's the turnaround time?
- Do you clearly understand the terms of the loan?
This is the basic process of utilizing a hard loan as a house flipping investor, or doing other real estate investments. Asking the right questions is an important step for both new and seasoned investors. Once you find the right lender, there is an opportunity to build a long-term relationship. And, as you demonstrate success and build trust, you can get better rates and loan terms.