Investors who have previously been able to qualify for 100% purchase financing to acquire investment properties are now facing much different conditions in the investor loan market place. Programs for investor loans have literally evaporated under the pressure of the subprime mortgage debacle. Many investors who formerly depended on subprime mortgage programs and ARM loans, are now seeking hard money loans for real estate purchases and rehabs. Demand for hard money loan programs nationwide has steadily increased. Real estate investors are discovering that hard money lenders are funding both residential and commercial investments.
According to Wikipedia: A hard money loan is a species of real estate loan collateralized against the quick-sale value of the property for which the loan is made. Most lenders fund in the first lien position, meaning that in the event of a default, they are the first creditor to receive remuneration. Occasionally, a lender will subordinate to another first lien position loan; this loan is known as a mezzanine or second lien. Hard money lenders structure loans based on a percentage of the quick-sale value of the subject property. This is called the loan-to-value or LTV ratio and typically hovers between 60-70% of the market value of the property. For the purpose of determining an LTV, the word "value" is defined as "today's purchase price." This is the amount a lender could reasonably expect to realize from the sale of the property in the event that the loan defaults and the property must be sold in a one- to four-month timeframe. This value differs from a market value appraisal, which assumes an arms-length transaction in which neither buyer nor seller is acting under duress.
Chairman Ben S. Bernanke who testified Before the Committee on Financial Services, U.S. House of Representatives on September 20, 2007 regarding subprime mortgage lending and mitigating foreclosures stated, "Markets do tend to self-correct. In response to the serious financial losses incurred by investors, the market for subprime mortgages has adjusted sharply. Investors are demanding that originators employ tighter underwriting standards, and some large lenders are pulling back from the use of brokers. The reassessment and resulting increase in the attention to loan quality should help prevent a recurrence of the recent subprime problems. Nevertheless, many homeowners who took out mortgages in recent years are in financial distress."
Tighter underwriting standards for investors mean that fewer investors will qualify for loans without substantial down payments, generally in the 20% to 30% range. These strict underwriting requirements for real estate investors will also lead investors to pursue more creative real estate funding options such as seller financing, carry-back, and hard money funding for purchase or rehab "fix and flip". While the markets are correcting, real estate investors are already gravitating to programs where they can obtain readily available funding to purchase investment property.
Many hard money lenders are willing to loan up to 100% of the purchase on a property, given the fact that the property LTV is approximately 70% or lower. These lenders are also willing to loan money for "rehabbing" the property and even structuring the loan so no monthly payments are required for 3 to 6 months. These features make hard money loans very attractive to the investor, especially during times when property inventory is increasing and properties can be purchased at substantial values. At the present time, rates for hard money are in the 10% to 16% range and hard money lenders are charging "points" typically, 1-3 more than a traditional loan, which would amount to 3-6 points on the average hard money loan. Commercial hard money loans range from 4 to 10 points. Investor credit may or may not factor into a hard money loan due to the fact that the funding is based on the "hard" asset value of the property collateralizing the loan.
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