Hard Money Construction loans
When you obtain a no doc hard money loan, in general, a hard money loan for real estate investment purposes, you also have the option of getting a construction loan, called hard money construction loans.
Hard money construction loans are funds that the hard money lender will lend to you in order to execute the actual project. If you are going to spend a hundred thousand dollars on it, obviously you could have the cash and you could just do the work yourself with your own working capital or you request the lender the constitution of a construction loan.
Now construction loans on hard money loans are a little bit different because they don’t just give you a hundred thousand and just let you go and play with those funds.
What they do is that they hold these funds in an escrow account, an ad hoc account to serve the hard money construction loan, and they give it back to you as reimbursement in a reimbursement item called “draw” or “draws” in plural.
Thus, when the hard money loan is arranged, you, as the investor or borrower (“borrower” is more adequate from a terminology point of view because the lender is also an “investor”) provide a scope of work, as one of the deliverables of the contract.
In hard money construction loans, the borrower promises the lender which activities will be executed within that project and how much each line item will cost, and at what phase you will be doing it.
Due to this concept, the borrower has to perform the renovation work and then get reimbursed for that money spent when the line item activities are approved after an inspection.
For example, you have four different draws, each one $25,000 worth. Thus, you have to show to your hard money lender that you completed that first quarter of your project, have them send an inspector in to look, and make sure that all that work is done, and then they will approve the line item and reimburse your $25,000
Interest In Hard Money Construction Loans And Some Cons
In these hard money construction loans, you still have to pay a 10% annualized rate and two points on those $100,000 of our example, even though you are not getting that money on day one, but after you complete each of these stages or line items agreed within the work of scope annex of these hard money construction loans.
That is why many borrowers are not interested in hard money construction loans while they are affirmatively interested in no doc hard money loans where the money is provided directly to pay the auctioneer or seller of the real estate object instead of depending on on these stages and their approval.
Because let’s say that you have an inspection done after you claim to have the stage or line item completed and request the reimbursement. The inspector does not agree that you did the work well.
Now you are out of your pocket and you need a fix to work with the money that you may not have because you’re over-leveraged versus the situation of the investor that has the capital in cash, and he could just fix it himself.
The worst part again of these hard money construction loans is that the lender charges you on day one. So let’s say you get your loan on January 1st; they will charge you that 10% interest on your hundred-thousand dollars even though you might not even get your draws until March or April which is a lot of time to wait.
Interest Rate And Origination Fee
Now there is a balance between your interest rate and your origination fee and some constructors or borrowers would say that if you are going to execute a very fast project, you should go for a lender that will give you a loan at a very high-interest rate but very low origination fees.
If you will complete your project in just one month, who cares what the interest rate is? Annualized, it is very low.
However, if the points, the interest you will pay, are fixed, with disregard of your completion date, it may not be worth it.
Requirements To Obtain A hard money construction loan
When you get a hard money construction loan, the lender is going to ask for some information. Anyway, for the most part, they would be looking at the property itself.
Obviously, the lender wants to see the address of the real estate object, and this will be studied by the underwriting team.
You, as the borrower, will have to justify why you think that this is a good deal to them.
The lender will require you to have a credit score of about 630 or above. Under 630, they will charge the borrower with a higher interest rate, more points, or they may not give you the loan at all
In hard money construction loans, the lender wants to have a scope of work, which is a document issued by the borrower. They want to see what kind of work would be performed on the property, with the actual numbers attached to it. Therefore, it is good to get a contractor to come by, take a look at the property, and give you an accurate bid before you actually get a hard money construction loan.
The borrower will require to see the experience that you have obtained in different properties in the past. Is this your very first project, do not lie. Tell them the truth, but if you have more experience, let’s say ten projects or more in the past two years, they’re gonna give you a significant discount and a better LTV ratio because they will trust you more, and they think that you are able to do the project as you said you will. I prefer to always work with the same lenders in hard money construction loans because I receive better conditions.
The lender might want to see some bank statements from you. Probably from the last one or two months, or more commonly, the last three months. With this, you will show your liquidity, meaning the money that you can use right away. Less liquid, but also admissible, are stocks, bonds, mutual funds, or straight-up cash, as we described before.
The lenders are not interested in the real estate you own, because you are not going to be able to sell your real estate and use that as cash right away. Thus, the lenders will be watching mostly at liquid assets: so watching liquidity down-payment, construction costs, closing costs, and six months of your monthly payments
Likewise, in hard money construction loans, the lenders are not interested in your tax statements at all, and this is one of the reasons why these loans are called “no-doc” too.
After the requirements are met, normally these hard money construction loans are wrapped up and closed in about 10 to 15 business days, and they can probably go even faster in some cases.
We have interesting articles about non-conventional mortgage loans. The basic ones we will recommend to you are stated income loans, where we discuss if they are currently legal or not, how can you obtain one, and the situation of these loans in California. We are also covering other non-conventional mortgages, such as the ITIN mortgages, luxury home financing that is a figure similar to the jumbo loans, the no ratio loans that do not consider the debt-to-income ratio during the underwriting process, and those loans offered by Funding For Flipping.
If you are into more conventional mortgages such as FHA mortgages, I suggest you read the following related articles described below.
We explain the FHA loan requirements completely, with the current limits for this year. We also go through the appraisal guidelines, and moreover, we are worried about the peeling paint and why it can be an issue.
Completing forms is necessary, so we also study the number format of an FHA case and how to submit an FHA file, how to complete the form HUD 92900, the form for the FHA notice to the homeowner, and the FHA Financing Addendum.
Regarding special housing programs, I would like to include the FHA Back To Work Program.
I am David, economist, originally from Britain, and studied in Germany and Canada. I am now living in the United States. I have a house in Ontario, but I actually never go. I wrote some books about sovereign debt, and mortgage loans. I am currently retired and dedicate most of my time to fishing. There were many topics in personal finances that have currently changed and other that I have never published before. So now in Business Finance, I found the opportunity to do so. Please let me know in the comments section which are your thoughts. Thank you and have a happy reading.