Getting conventional mortgage products for rehabbing properties can be hard. Besides the massive credit requirements and paperwork, you have to go through a time-sapping and arduous screening process. Hard money rehab loans can save you the trouble if you’re looking for quick and efficient financing routes.
Whether you want to rehabilitate a home for yourself or flip it for a profit, being well-informed on hard money loan products will help you navigate the scene with confidence. We have put together this guide to discuss:
- The overall viability of hard money loans
- Qualification and screening aspects
- Certain risk factors to watch out for
Rehab Borrowing—A Quick Summary
Traditional mortgage products are long-term and geared towards providing homebuyers with a comfortable option to pay off the loan in 15 to 30 years. You need to put in a small sum (10%–30%) towards a down payment, and you’re ready to buy the home and move in.
Rehab loans are a bit more complicated than regular home loans because the property isn’t livable yet. You have to throw in a significant sum towards repairs and wait another 3–15 months for the house to be ready. Like in the case of construction loans, the property’s recoverable value is up in the air until the project is completed, which entails a higher lending risk.
Source: Tima Miroshnichenko
Rehab loans are considered sophisticated financial tools, and they make more sense than home loans in many situations. The product is the go-to option for property flippers or investors looking to set up a rental unit as they don’t qualify for self-occupied mortgages. Homeowners on a budget also prefer rehab loans for upgrading their current home or buying a new one because of a low down payment obligation.
Choosing a lender for rehabbing is challenging because you need someone understanding and flexible, and big-name banks may not always be up for the task. That’s where hard money lenders have the opportunity to shine!
Why Hard Money Rehab Loans Work Better Than Conventional Loans
A typical rehab loan is short-term and has a higher interest rate than generic home mortgage rates, regardless of the lender you work with. So, more than the pricing, it’s the following six factors that make hard money rehabbing packages a consumer favorite:
- Easy qualification standards—Qualifying for rehabbing packages with banks is excruciating because of the bureaucracy involved in such products. Hard money loans are asset-backed and don’t entail excessive compliance, so the lenders don’t look too much into credit scores and personal finances for risk mitigation
- Convenience—Consumers prefer hard money-enabled rehabbing because of minimal paperwork requirements and quick processing
- Speed—Application screening for bank-financed rehab programs, such as a Federal Housing Administration (FHA) 203(k) or a Fannie Mae HomeStyle Renovation loan, lasts up to 90 days. The wait time for getting hard money funds is 2–3 weeks
- Control over funds—Banks transfer the rehab funds to an escrow account and make transfers to your contractor periodically. Hard money lenders usually transfer the funds directly to borrowers, so you get the flexibility to conduct DIYs instead of hiring contractors
- Immediate cost commitment—Traditional rehab loans require the borrower to offer the down money for the escrow account along with the closing costs. Your immediate cash outflow is much lower with hard money rehab products. You don’t have to come up with an urgent down payment, and the closing costs are usually due at the end of the tenure
- Fewer restrictions—Unlike banks, hard money lenders won’t dictate eligible and ineligible repairs. They also don’t care about how many housing units you hold or if you’re using them to facilitate investment, rental, or business goals, allowing property flippers to have a higher volume of rehab projects
How To Get a Hard Money Loan for Rehab
Hard money lenders offer rehab loans based on the quality of a deal and the borrower’s credibility as a rehabber, which can be something as simple as market goodwill. The amount you can borrow—loan-to-value or LTV ratio—is also not set in stone. Based on the assessed risk, the LTV is a percentage of the after-repair value (ARV) of the property, although many lenders prefer to lend X% of the as-is value and Y% of repairs, calculated separately.
What Are the Common Screening Parameters for Hard Money Rehabbing?
While the screening process for hard money loans varies from lender to lender, it is hardly intimidating. The following table will give you the big picture on common qualification parameters for hard money rehab loans:
|Parameter||What Hard Money Lenders Check|
|Property valuation||Since the property cash flow is the main focus, any hard money lender will start evaluating the realistic potential of the house after rehab. It’s basic due diligence—e.g., if a property is located in an area marked for commercial development, the lender has every reason to reject the application|
|Cost projection||The lender would evaluate if the repair cost is reasonable in terms of the ARV. Hard money lenders typically don’t ask for an itemized sheet of planned rehab expenses like banks, but having a pre-planned budget would make you a more desirable candidate as it would help them quantify the return on income (ROI)|
|Rehabbing experience||Hard money lenders value loyalty and customer relationships, which influence how they choose clients. Regular property rehabbers have an advantage over first-time rehabbers when it comes to the ease of accessing hard money funds. That being said, many lenders welcome and guide new investors looking to build wealth through real estate|
|Repayment strategy||A hard money lender would see the suitability of your repayment strategy. In the case of rehabbing, the monthly payments are interest-only, and borrowers settle the debt by:|
• Selling the property
• Refinancing with a permanent mortgage
What About Personal Finances—Do They Matter?
Bad credit is generally not an issue with hard money lenders, but they may still do a basic check on your financial health, especially if you’re a first-time borrower. Here are five factors that can lead to rejection:
- A credit score tagged as Very Poor
- Multiple bankruptcy filings
- A history of foreclosed rehab properties
- Dishonest disclosures about finances
- Little to no equity in the property (borrowers who avoid investing their own funds in the project are more likely to turn cold if the rehabbing goes sideways)
Keep in mind that hard money lending rides on negotiations—even if you don’t qualify according to a lender’s particular guidelines, they may still work with you if they see solid potential in your distressed property.
How To Find the Right Lender for a Hard Money Rehab Loan
In the past, seasoned property rehabbers had to rely on their network to find lenders, and their choices were limited. That’s not the case anymore—you can find hard money lenders operating in your state online. Many even maintain organized, informative websites to throw some light on the services they offer.
Source: Kampus Production
Before choosing a lender, you should do basic research on criteria like funding time and user satisfaction. Watch out for shady lenders who display red flags, such as:
- Poor communication efforts
- High initial costs
- Exorbitant prepayment penalties
- Non-existent property appraisal standards
- Undefined funding guarantee
Hard Money Loan (HML) Solutions Offers Tailor-Made Hard Money Rehab Loans
With the right lender and a nifty plan, rehabbing should feel like a walk in the park. Hard Money Loan (HML) Solutions is your ultimate option if you want a reliable rehab lender by your side. The company operates from Delray Beach, Florida, dealing in real estate loans for properties across the state.
HML Solutions offers highly flexible, borrower-friendly rehab loans serviced after a thorough analysis of the property. If a deal looks promising, you can expect a package designed specifically to suit your needs. The team consists of experienced property investors, business professionals, and entrepreneurs who provide one-on-one guidance throughout the rehab cycle. There’s always wiggle room in case you encounter problems mid-rehabbing—all you have to do is communicate with the team, and they’ll start looking for solutions.
Source: Google Reviews
Hard Money Loan Solutions commands a 5-star rating on Google due to the group’s dedication to building long-term customer relationships. The core points of their service include:
- Quick turnaround time
- Prompt and transparent communication
- Manageable repayment schedules
- High responsiveness to queries
- Competitive interest rates and closing costs
- Unwavering funding guarantee
- Minimal paperwork
The HML Solutions group doesn’t discriminate when it comes to borrowers—tanking credit scores, existing liens, and tax defaults are usually overlooked if the deal is serviceable. That being said, the initial screening will be quicker for borrowers with rehabbing or construction experience or those who have solid construction plans. Apply for an HML rehab loan to get objective guidance from a veteran lender for free!
HML-Enabled Rehabbing Entails the Lowest Out-of-Pocket Costs!
Many private lenders ask for various charges out of the blue, which makes the financing expensive for you. At HML, your total cost commitment is discussed beforehand. In most cases, you only pay a small retainer fee to cover the initial legal expenses—your closing cost is due when you settle the loan.
The table below summarizes the primary costs and loan terms of a regular HML rehab program:
|Aspect||HML Rehab Loan (Sample)|
|LTV||Up to 70% of the purchase price or as-is value (whichever is lower)|
|Interest rate||9.99%–12% (low LTV equals low rates)|
|Origination fee||2 points or 2%|
|Closing time||3 days to 2 weeks|
|Prepayment penalty||No penalty if settled after 6 months|
|Down payment||Not asked for|
Source: Ketut Subiyanto
Rehab Loans—Logistics at HML Solutions Explained
The loan screening process at HML Solutions begins online. You have to fill out an online application form and wait for a lender to review it and contact you. The entire process can be summarized in three stages:
- Phone call—You get to talk to a lender directly. The initial conversation revolves around the specifics of your deal, the urgency of funding, and your rehab plan
- Property appraisal—The lender looks at the latest appraised value of your property and compares how easy or difficult the deal is for other financiers. Each deal is handled on a case-by-case basis to enable fair loan customization
- Closing—Once a deal is finalized, the lenders set up the title work and survey aspects of the deal. Approved clients are usually funded within ten days
Know that HML lenders may suggest alternative packages or lending channels if your deal isn’t serviceable. For example, if your property is too decrepit and needs complete remodeling, they may offer you a bridge or a construction hard money loan instead. The group also services other asset-backed loans for:
- Any real estate acquisition (residential or commercial)
- Home refinance and cash-out refinance
- Business funding or acquisition
- REOs and bank-foreclosed properties
- Acquisition of a special-use asset
- Land purchase
Hard Money Rehab Loan—Risk Factors and Mitigation Strategies
If you’re rehabbing for profit, it’s prudent to be aware of the risk factors in the industry. Lenders from HML Solutions suggest borrowers analyze their project for the following threats:
- Dipping real estate prices—Real estate prices going down is a risk everyone in the industry faces. Do your research before picking rehabbing estates to ensure you’re investing your energy in the right direction. It’s advisable not to leverage your home equity to acquire high-risk estates
- Inability to complete the rehab—Many DIY rehabbers cannot complete their projects because of injuries or illnesses. Understand the hit your ROI can take in case you have to work with contractors. Giving up on the deal halfway through will not only cause losses to you and the lender but also tarnish your reputation as a rehabber
- Extra costs—Dedicate around 10% of your rehab budget towards unforeseen expenses. If you do have buffer funds remaining at the end of the rehab, you can always add luxury features to the property and sell it for a larger profit
- Slow-selling property—If, after rehab, finding the right buyers is hard, have a backup of long-term refinancing options to get out to the rehab loan quickly
Reach out to Hard Money Loan Solutions if you want personalized advice on your rehab situation.
Featured image source: Dan Meyers