{"id":3012,"date":"2021-01-18T21:09:01","date_gmt":"2021-01-18T20:09:01","guid":{"rendered":"https:\/\/businessfinancenews.com\/?p=3005"},"modified":"2021-06-12T22:56:42","modified_gmt":"2021-06-12T21:56:42","slug":"no-doc-hard-money-loans","status":"publish","type":"post","link":"https:\/\/businessfinancenews.com\/loans\/no-doc-hard-money-loans\/","title":{"rendered":"No Doc Hard Money Loans"},"content":{"rendered":"\n
The no doc hard money loans mortgage market has greatly expanded since the 2009 mortgage crisis with the passing of the Dodd-Frank Act. The reason for this expansion is primarily due to the strict regulation put on banks and lenders in the mortgage qualification process. The Dodd-Frank and Truth in Lending Act set forth Federal guidelines requiring mortgage originators, lenders, and mortgage brokers to evaluate the borrower’s ability to repay the loan on primary residences or face huge fines for noncompliance. Therefore, no doc hard money lenders only lend on business purpose or commercial loans in order to avoid the risk of the loan falling within Dodd\u2013Frank, TILA, and HOEPA guidelines.<\/em><\/p>\n\n\n\n From inception, the hard money field has always been formally unregulated by state or federal laws, although some restrictions on interest rates (usury laws) by state governments restrict the rates of hard money such that operations in several states, including Tennessee and Arkansas, are virtually untenable for lending firms<\/em><\/p>\n\n\n\n A no doc hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by real property. They are typically issued by private investors or companies. Interest rates are typically higher than conventional commercial or residential property loans because of the higher risk and shorter duration of the loan.<\/em> A no doc hard money loan is therefore a type of loan that is secured by real property. These loans are primarily used in real estate transactions, with the lender generally being individuals or small companies and almost never regulated banks.<\/em><\/strong><\/p>\n\n\n\n Most no doc hard money loans are for only three to four months. They have very high-interest rates compared to a traditional thirty-year amortized mortgage, but they are utilized because they allow the borrower to purchase properties that normally could not be afforded or would require a longer contract negotiation.<\/p>\n\n\n\n For example, suppose a property that costs at least a million dollars and most people just do not have a million dollars in cash, and if they had to go through a traditional route of obtaining a long-term mortgage, it would take over a month to close escrow.<\/p>\n\n\n\n In no doc hard money loans, the deal is only possible because the auctioneers or sellers are in some kind of financial distress and the prospective buyer is able to close quickly on these deals with the financial support of the lender<\/strong>.<\/p>\n\n\n\n Being able to use no doc hard money loans allows the borrower to purchase a property and close the operation within ten to fifteen working days, whereas a traditional loan can sometimes take over thirty days.<\/p>\n\n\n\n The interest rates on hard money loans are typically higher than the rates charged for traditional business loans. Rates could be as low as 6% and as high as 14% or more. <\/p>\n\n\n\n Despite this, such loan options are popular among real estate investors for their fast approvals, higher flexibility, less extensive documentation procedures, and because they are sometimes the only option for securing funds.<\/p>\n\n\n\n Typically, if you are brand-new in the real estate market, then you probably cannot get as much leverage as an experienced investor can, so you are looking at obtaining no doc hard money loans at 85% LTV or 90% LTV at the best. <\/p>\n\n\n\n What does that mean is that if your loan to value ratio is either 85% or 90%? For example, if you have a million-dollar property, then the maximum that someone will loan you is either 850 thousand for an eighty-five percent LTV or 900 thousand if it’s 90 percent LTV. The remaining money should be brought by the borrower as a down payment.<\/p>\n\n\n\n Now, what does it cost to get no doc hard money loans? Well, for a brand-new investor you are typically going to see rates at ten percent annualized and two points for the origination<\/strong>. That means for your $90,000 loan a ten percent of that nine hundred thousand is due every year and an annualized rate, so after holding that loan for a whole year you have paid ninety thousand dollars in interest payments.<\/p>\n\n\n\n Yes, that sounds like a very expensive deal and much worse than a traditional long term mortgage, but it is worth it for the investor who is going to make two hundred thousand dollars on the back end.<\/p>\n\n\n\n What are origination fees? Origination fees are about 2% of the no doc hard money loans and are the fees that the hard money lender charges you to originate the loan. The origination here means to create the loan for you, so using “creation” as a synonym with “origination”.<\/p>\n\n\n\n The no doc hard money lenders have people working for them in the back-office underwriting the loan, salespeople who are creating the packages for the borrower, lawyers drafting a contract, and working with you to close on time. All these back-office services cost money and finally the borrower will be paying for them in a line item called “origination fees”. <\/p>\n\n\n\n Most of them are 2% for new investors so for on a $900,000 loan on a 1 million dollar property and 2% origination fees you will be paying $18,000 just to close on the loan. <\/p>\n\n\n\n But they do not charge you directly this 2% of origination fees. What they actually do is that they just give the borrower a smaller loan, so instead of giving the investor that $900,000 loan expected, they are going to give the borrower a loan for $882,000 (eight hundred eighty-two thousand dollars).<\/p>\n\n\n\n Usually, the consequence of this is that the borrower has to come up with more money to close on the property in the first place. <\/p>\n\n\n\n Most no doc hard money loans are used for projects lasting from a few months to a few years. Hard money is similar to a bridge loan, which usually has similar criteria for lending as well as costs to the borrowers. <\/p>\n\n\n\n The primary difference between a no doc hard money loan and a bridge loan is that a bridge loan often refers to a commercial property or investment property that may be in transition and does not yet qualify for traditional financing, whereas hard money often refers to not only an asset-based loan with a high interest rate, but possibly a distressed financial situation, such as arrears on the existing mortgage, or where bankruptcy and foreclosure proceedings are occurring. <\/p>\n\n\n\n So when you come as an investor\/borrower to a closing table, what kind of funds do they need you to have when working with no doc hard money loans?<\/p>\n\n\n\n Obviously, they want the borrower to have the 10 percent or 20 percent as the down payment for the property, but you also are required to possess enough liquid capital to pay for the origination fees.<\/p>\n\n\n\n Furthermore, you are required to possess enough working capital to pay for all other buyer-closing costs like notary fees and other miscellaneous items that they charge the borrower when closing the deal for the property. Many borrowers include these miscellaneous items inside the origination fees line item.<\/p>\n\n\n\n When you are considering to enter into no doc hard money loans, you also have to be careful if they have a prepayment penalty. <\/p>\n\n\n\n Sometimes they will charge you for a predetermined number of months of payment regardless if you close the no doc hard money loan through a complete payment in one or two months.<\/p>\n\n\n\n Therefore, so some investors or borrowers do something called “wholetailing” where they buy a property with a no doc hard money loan, and they put it back on the market without doing anything, and they sell it within a short period of time.<\/p>\n\n\n\n If you have a loan that has a four-month minimum that you have to pay those four months’ worth of interest payments no matter what, that is a contract clause of prepayment penalty.<\/p>\n\n\n\n Hence, just be careful when you are getting a loan of this type to ensure that there is no prepayment penalty within the terms defined by the lender, or if there is such a clause, that it does not affect you because you have planned to spend a long time working on that project, presumably, a construction or renovation project, anyway.<\/p>\n\n\n\n Thus, no doc hard money loans are typically for the real estate business and specifically for house flippers, people doing fix-and-flip<\/strong>.<\/p>\n\n\n\n No doc hard money loans can be understood much better if we describe a complete step-by step business process life cycle starting from a prospective investor or potential borrower who is interested in a real estate object that requires a lot of renovation or that can be rearranged completely during an auction. This is the typical profile of our readers, by the way.<\/p>\n\n\n\n What usually happens in the real estate business is that the investor desires to flip a house and earn money from that operation.<\/p>\n\n\n\n The investor finds a property at a $250 000 purchase price at an auction, and he needs to close very quickly on this house, otherwise, the auctioneer may close the deal with another buyer.<\/p>\n\n\n\n Unless this borrower has 250 000 cash in his pockets to put down, he will require another source of money and that is usually where hard money lenders step in and the entire no doc hard money loans business approach appears, in opposition with traditional long term loans.<\/p>\n\n\n\n Typically, hard money lenders can obtain money for these investors very fast. Sometimes it is five to ten days, the time period in which they can have the money in your pocket or better said, available for you.<\/p>\n\n\n\n If you have a relationship with these lenders, what you will normally have after your first project working together, they can close in three to even five days or give you a proof of funds for you to move forward with the seller or auctioneer. <\/p>\n\n\n\n You can really work with them to be your financial partner to make sure you grab the best hammer price at the auction, so they specialize in the speed of getting deals done fast. <\/p>\n\n\n\n Now, why are they called no doc hard money lenders? Where is “hard money” coming from? It is because their terms and conditions are quite higher than usual. It is hard money because it is a little bit expensive money, however, it gets the deal done for the borrower. <\/p>\n\n\n\n The borrower will not care much about the higher interest rates of no doc hard money loans, because the deal can be closed faster with the seller or auctioneer.<\/p>\n\n\n\n So for example on this 250 000 dollars house from our example, let’s say they do a hundred percent of the deal (100% LTV in our hypothesis, but more typical is to find an average of 70% LTV) to purchase the home.<\/p>\n\n\n\n Your plan, as an investor, is to perform the renovations of the house spending, let\u00b4s say, fifty thousand dollars ($50,000) in renovations and you will sell it for four hundred thousand dollars afterwards.<\/p>\n\n\n\n Therefore, you bought it through a no doc hard money loan for the aforementioned 250K, you are going to put 50 grand in ($50,000) and you are going to sell it completely refurbished for $350,000. This represents earnings for $50,000 on this transaction, before taxes.<\/p>\n\n\n\nPros And Cons<\/strong> Of No Doc Hard Money Loans<\/h2>\n\n\n\n
Interest In No Doc Hard Money Loans<\/strong><\/h2>\n\n\n\n
Costs Of No Doc Hard Money Loans<\/h2>\n\n\n\n
Origination Fees<\/strong> As A Cost Of The No Doc Hard Money Loans<\/h3>\n\n\n\n
Difference With A Bridge Loan<\/strong><\/h2>\n\n\n\n
Down Payment Required<\/strong><\/h2>\n\n\n\n
Prepayment penalties<\/strong><\/h3>\n\n\n\n
Complete Business Case From The Investor Point Of View<\/strong><\/h3>\n\n\n\n