Updated: Mar 14, 2021
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On Episode 9, we had Brendon Harrington from Constructive Loans as a special guest, and we talked about hard money lending, which is something that most of you may have heard about once or twice. Contrary to what most people think, hard money lending does not mean that money is hard to get. Instead, it means that the lending is “asset-based.”
Okay, maybe there are a little too many technical terms here, so let us back up a bit. To really understand what hard money lending is, we have to compare it with the traditional lending that people get from banks or government agencies. The thing is, getting loans from these institutions can be quite a hassle. Not only is there plenty of red tape and bureaucratic processes to get into, but it is also harder to get a loan from them because you have to qualify to get a loan. That means they will look at your income, your credit score, your credit history, and other factors to determine if they will be willing to lend you money.
Hard money lenders do not need to look at all that. The only things they will be looking at are the deal's profitability (if you are getting a loan to rehabilitate a property, for example, they will assess how successful you’ll be at rehabilitating it) and the assets you have. They check the profitability of the deal by looking at the purpose of the loan. If it is for flipping real estate, the lender will look at the borrower’s capability to quickly rehabilitate and sell the property. If it is a rental loan, they will look at the rent schedule.
In the case of Constructive Loans, they are looking at around $25,000.00-$30,000.00 in reserved funds and other liquid assets like stocks, mutual funds, bonds, retirement accounts, and the cash value of the borrower’s life insurance.
What makes them different is that they are not even going to look at your job or if you are working. What is important is you have assets to cover the loan that can ensure that you pay. That is what “asset-based lending” is. In other words, it refers to loans that are given mainly based on the borrower’s assets, which determine whether they can pay the loan.
One difference that hard money lenders have compared to traditional lenders is that they have higher interest rates. This is understandable because hard money lenders — with their more relaxed guidelines — are taking on more significant risks with their lending schemes. Despite the higher interest rate, however, they still look to ensure that the deal is still affordable for the average person. The higher rates are also offset by the fact that the loans are short-term deals, which means that the borrower needs to make payments for only around six to twelve months.
Now you might think that purely asset-based lending means that you do not need a high credit score to get a loan from them, and you would be right. However, hard money lenders still require a decent credit score, at least. Constructive Loans, for instance, requires at least 620, which is a fair requirement compared to the usual requirements of 670-740. It is also a huge plus for the borrower if they already have experience as a landlord or investment property holder because most hard money loans are taken to finance real estate transactions.
Speaking of real estate transactions, one of the most essential factors they also look at is the property’s ARV or after-repair value for loans that are taken out for renovation deals. In the case of Constructive Loans, they assess the property’s ARV and will lend only up to a maximum of 75% of the property’s ARV. That way, the borrower’s exit strategy will never be jeopardized, and they still have leeway to profit off the whole transaction after paying off the loan.
There is a whole lot to talk about when it comes to hard money lending, and you should not get scared just because of the higher interest rates and the unconventional nature of it. The truth is, hard money lenders are an easier way for people to fund their real estate projects, and it can also be a better option for those who are sure of their skills when it comes to rehabilitating and profiting from real estate. The fact that hard money lenders also do not consider it a dealbreaker for a person to be a totally new investor can be a plus for some, especially those who wish to get a loan but cannot get it from the banks.
Hopefully, the episode with Brendon has enlightened you all about hard money lending. For more advice on financial freedom through real estate, go ahead and check out our YouTube channel: GoFish Village.
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