A hard money loan is non-traditional financing where the funds are provided by a private investor to a entity. Hard money loans often have a higher interest rate and higher closing costs, but easier qualifying guidelines when compared to traditional loans.
Hard money loans can be used for a variety of purposes and are considered commercial loans, not residential home mortgages. The Mortgage Mark Team can originate both residential and commercial loans.
Hard money loans can be used for various asset classes. For example, hard money can be used to purchase residential homes, multifamily properties, senior-housing projects, industrial properties, provide business loans to companies, etc..
Hard money loans are typically made to entities, not to individuals. Most mortgages for the purchase of residential properties will close in a single-member LLC.
- DSCR Program <<coming soon>>
- Bank Statement Program <<coming soon>>
- BRRR Method <<coming soon>>
Hard money financing is only issued on investment properties, not primary homesteads. These are commercial loans and don’t follow the same scrutiny (or regulation) of a traditional residential mortgage.
One advantage of a hard money loan is that it can be closed quickly with minimal effort. Short-term hard money loans for the purchase of residential real estate can close within 24 hours (but typically average about five days). The longer-term hard money loans (like the 30-year fixed rate options) will often require a more typical closing timeline of 30 days.
The disadvantage of hard money loans is that they are more expensive than traditional financing. The type of hard money loan, and the documentation that is provided during the process, will determine the premium that will be applied to the rate and costs. Typically, the quicker the process, the lighter the documentation, the higher the terms.
Hard money loans should not be feared. In the early 2000’s, before the Mortgage Meltdown of 2007/2008, hard money loans were often issued by unscrupulous lenders. Today’s hard money industry has evolved and there are now reputable financial intuitions that issue the funds. It’s become a thriving (and profitable) industry that now emphasizes relationships with the investors.
Hard Money Lenders
The Mortgage Mark Team has relationships with various financial institutions that offer hard money lending. That said, we are not an exclusive hard-money lender. Unlike most hard money lenders, we are a dominate player in the “normal” mortgage industry. This is an extreme advantage.
Licensed Loan Officers vs. Hard Money Lenders
Unlike most hard money lenders, the Mortgage Mark Team is comprised of licensed Residential Mortgage Loan Officers (RMLO). What’s crazy is that a license is not required to originate a hard money loan since it is considered a commercial transition.
Due to the low barrier to entry of commercial lending, hard money Loan Officers are often inexperienced and lack real-world knowledge for investing. Because the Mortgage Mark Team offers traditional residential mortgages (as well as hard money loans), our Loan Officers are registered with the NMLS (Nationwide Mortgage Licensing System).
We highly recommend working with licensed mortgage professionals that understand all aspects of the industry. Be sure to inquire about the background of a hard money lender.
Mark Pfeiffer’s Investment Resume
I’m Mark Pfeiffer, the Senior Loan Officer of the Mortgage Mark Team, and I have been a licensed Mortgage Loan Officer since 2003. I’m sharing the highlights of my investing career not to brag, but to demonstrate that my team and I are proficient in real estate investing.
I bought my first long-term investment property in 2004. I continued to buy rental properties for the following 15 years. Ultimately I was able to amass an investment portfolio of sixteen, long-term rental properties in the greater Dallas area. When I sold them in 2021, the cumulative market value was north of $3,500,000.
As an investor, I have done fix and flips, invested in multifamily, and developed raw land. I’ve done seven commercial loans with various banks, and even been the hard-money investor for friend purchasing a home.
On the personal side, I have done two home improvement loans, a HELOC, an unsecured line of credit, and a one-time close construction loan. In short, I know how to fund real estate.
I promise I’m not trying to brag. I’m really not. I’m simply trying to make the point that it’s worth working with someone that has “been there and done that.” Bad advise can cost you money. I know from experience.
Purposes of Hard Money Loans
There are a few primary applications for hard money loans when purchasing residential real estate for investment.
Fix and Flip
The fix and flip method is very common for residential real estate. Fix and flips are a great way to convert time and energy into profit. Many real estate investors (and future homeowners) don’t have the time, knowledge, resources, or desire to buy distressed properties. This is where the fix and flip investors capitalize.
The concept of a fix and flip is to:
- buy a distressed and under-valued property,
- renovate and remodel the home,
- and then sell the home for profit.
The fix and flip programs allow investors to put down a minimal investment and financing some (or all) of the repairs. Most hard money programs will allow as little as 10% down.
The key to turning a profit on a fix and flip is to buy the house at the right price. The old adage holds true: “you make your money on the buy, not on the sale.” The challenge for the fix and flips is sourcing the deal. Executing the plan is a necessity, but sourcing the deal and negotiating the price are the primary drivers for the profit.
BRRRR Method for Long-Term Rentals
BRRRR is an acronym for “Buy, Rehab, Rent, Refinance, and Repeat” and is pronounced “burr” (like you’re cold). This is technically a methodology for investing and not a loan program.
The idea of BRRRR is that an investor can purchase and renovate a residential home using short-term hard money, and then refinance that short-term loan into a more favorable, more traditional, long-term “normal” mortgage. The permanent financing for the traditional mortgage is typically done by a licensed Residential Mortgage Loan Officer.
The last “R” in BRRRR is for “repeat”. In an ideal scenario, an investor will be able to do a cash-out refinance after the rehab is complete to recoup their initial cash investment. The investor can then use the cash from the refinance to “repeat” the process and buy another investment home.
This is a great strategy if the numbers work. The challenge is having enough equity in the home to access a meaningful amount of cash. The “normal” mortgage world limits investment cash out refinances to a 75% LTV. Often times investors are unable to recoup their initial costs, and those funds will remain in the property until a future sale.
Bridge loans mean different things to different people. The general definition of a bridge loan is: financing that provides a short-term benefit before long-term financing can be established.
The hard money loan in the aforementioned BRRRR method is a bridge loan. It’s short-term money that used to purchase and rehab a property. This is the primary example for investing in real estate.
Note: there are other applications of bridge loans, but those aren’t relevant to buying an investment property.
Long-Term Buy and Hold
The long-term buy and hold strategy is a great strategy that can build wealth over time. It’s the “get rich slow” strategy. Often times traditionally mortgage financing is used to acquire long-term rental properties.
Traditional financing will offer more favorable financing terms compared to hard money loans (i.e. better rate and lower costs). Better terms translate to more profit. Traditional financing can even provide funds for future renovations like the hard money fix and flip program.
So why use a hard money loan for a long-term buy and hold? Simple, because of qualification requirements. Hard money loans (like the program described below) offer alternatives for financing for the the investors that don’t want to (or can’t) qualify for traditional mortgages.
30-Year-Fixed Rate Hard Money Loan Programs
There are a variety of hard money loan programs, but very few offer the stability and predictability of a 30-year-fixed interest rate. Hard money loans are often six-month loans that are used to fix and flip real estate; however, there are exceptions that offer longer-term financing.
Many hard money loans can offer terms that are 5 year, 10 year, or even 20 year programs. What’s interesting is that the 30-year fixed rate hard money loans are offered by traditionally financing instructions. The programs below offer the stability of a 30-year-fixed-rate mortgage for long-term rental options.
Debt-Service Coverage Ratio (DSCR)
Debt-Service Coverage Ratio (DSCR) loans are great programs for investors. These programs do not require income documentation and use cash flow from the subject property for qualifying. The income used for qualifying with a DSCR loan is based on the cash flow from the property.
There a number of different metrics that influence the financing terms for DSCR loans. The three most predominate factors are:
- the property’s ability to generate cash flow,
- the down payment amount, and
- the borrower’s credit score.
Each DSCR lending institution will have a unique set of guidelines. The only way to truly know the details of what’s available is to submit a loan application and have a Loan Officer run the traps.
Bank Statement Programs
Bank statement programs are hard money loans that do not require income documentation. In other words, they do not require tax returns, W2s, K1s, or paystubs. The income for these home loans are derived from the deposits into a business bank account.
Every lending institution will have their own set of qualifying guidelines. Some may require only three month of business bank statements, while others may required 12 to 24 months of statements. Typically, the more documentation that is provided, the better the financing terms.
Call To Action
As always, please contact us if you have any questions about hard money loans, or any other real estate topics. We’re here to help and be a resource for you. We believe a mortgage is a financial vehicle that can help you build wealth. We look forward to working with you.
Loan Officer, NMLS # 729612