What is a Hard Money Loan and how does it work?
A hard money loan is similar to a mortgage from a conventional lender (a bank, an insurance agency, a trust), however the three biggest differences are the speed with which a loan can be closed, the loan term, and the interest rates.
Hard Money interest rates vary and can be anywhere from 7% up to 15% (and sometimes higher) depending on the Lender’s perceived risk.
Loans can be closed as quickly as 1-2 weeks depending on the project that needs funding, which is extremely quick as compared to the 60-90 days with a conventional lender.
Loan terms are generally short-term (1-2 years) as borrowers do their best to either sell or refinance their properties with a conventional lender so as to avoid the higher interest rates.
The last difference, although this does vary from hard money lender to hard money lender, is that your average hard money lenders do not do much background investigation into their borrowers. Unlike a conventional lender or a crowdfunded lender, credit scores and personal finances typically aren’t taken into account as long as the property itself produces enough income to service the debt.
What is Crowdfunding and how does it work?
Crowdfunding, in its simplest form, is a way to raise money to fund debt or equity in an investment by raising small amounts of money from a very large investor pool, typically via the internet. There are crowdfunding sites for a variety of different industries, however, it is a relatively new practice within the real estate industry.
Rates and terms are similar to that of a hard money lender, however with crowdfunding it may be possible to secure a loan at a higher LTC ratio (loan to cost ratio). The only drawback is that, like conventional lenders, there is an underwriting process to be approved as a borrower and things like credit scores and personal finances are investigated before approval.
What are the upfront fees for both?
Upfront fees can vary greatly from lender to lender, but they are similar for hard money loans and crowdfunded loans, however, with lower overhead, crowdfunding platforms may have slightly lower fees.
Fees for title insurance, an appraisal (if required), and due diligence are pretty standard across both types of loans.
How to decide which method would work best for you?
As mentioned above, both options can close fairly quickly and have similar fees and rates, however, only a hard money lender will essentially ignore credit scores and other personal finances. Crowdfunded lenders are generally much more concerned with WHO the borrower is as opposed to hard money lenders who are much more concerned with WHAT they are lending on.
Again, there are positives to both types of lenders but if you don’t have your financial ducks in a row, securing a loan through a crowdfunded lender can be much more difficult, even if the asset itself justifies the loan.
Contact one our experts for more information.