Hard Money Rehab Loans 101

That moment when you’ve run the numbers and you realize you have just found yourself a really good deal… that is not the best moment to start thinking about how you’ll pay for the deal or afford to do the rehab.

If it’s only capital holding back your real estate investment business, then it’s time to seriously look into hard money rehab loans and see what it would take for you to qualify. To be clear, a hard money loan is a short-term loan used to acquire investment properties to rehab and either flip for resale or rent out, and the money is loaned to you against the value of the real estate asset you are acquiring.

There Are Many Hard Money Lenders

Different lenders structure hard money rehab loans in various ways and they even differ quite a bit on what it takes to qualify. This is why it is so important to search for a hard money lender that suits your needs, before finding your deal and needing the hard money rehab loan right away. You can google for hard money lenders in your area, check on Facebook, and there’s even a directory at BiggerPockets.com. You might be able to meet some lenders at your local real estate investor association meeting. Fellow rehabbers can probably give you the best insight, telling you about the experiences they’ve had with hard money rehab loans in your area. (Or save yourself the effort and just get in touch with us; we do hard money rehab loans here at Legacy Capital).

How To Understand Your Hard Money Lender

Usually hard money lenders will loan you capital based on a percentage of the after repair value (ARV). At first you may think the lender is speaking a different language when they lay out their terms like this, “We’ll loan you 70% of ARV with 5 points, 500 in document fees and a 6 month interest only balloon payment loan at 10%.” Here’s what they mean if we apply this to a house with an ARV of $250,000. You’ll be able to borrow up to $175,000 (70% ARV) at 10% interest. It will cost you $8750 (5 points or 5% of the loan) plus $500 in document fees. You’ll be making an interest-only monthly payments (approx. $1500) until you sell the property or six months have expired.

Here are the steps you’ll typically follow in the hard money lending process.

  1. Search for the lender who can offer you the kind of hard money rehab loan that will work for you.
    Get to know your hard money lender and whether you are a fit.
  2. Find your deal and get it under contract.
  3. Share the details of the deal with your hard money lender, including your projected ARV and estimated cost of repairs. The hard money lender will ask you to get the property appraised or send out their appraiser.
  4. The lender will approve or reject the hard money rehab loan. If they approve, they’ll tell you what amount and under what terms they will loan it to you.
  5. You close the loan, typically at a title company or lawyer’s office. The lender transfers the loan amount into escrow at the title company.

Hard money rehab loans will allow you to grow your real estate investment business far beyond what you could do with just your own capital. It’s best to find your hard money lender first and then find your next deal. It’s very different than dealing with a bank and applying for a long-term mortgage, but hard money rehab loans are perfectly suited for the kind of house flipping you’re doing.

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