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What are Hard Money Loans?
For the purpose of financing your investment properties there are two options- Hard Money & Soft Money.
Soft Money- is simply money that is borrowed from banks and other lending institutions. This is the normal loan process where the loan is underwritten by an underwriter. There are rules and guidelines that are made by the lenders or by the groups that buy the loans from the lenders. This would include all loan types and verities.
Hard Money- is money from investors to fund your investment property. Hard Money is normally sort term. Hard Money is normally used when the property needs some repairs and rehab. With Hard Money you can finance the expense for repairs as a part of your loan. If you are able to locate a home with good equity you will be able to do the entire purchase and rehab with no money out of your pocket.
The Rules- since the money is coming from private investors they can make their own rules, unlike soft money above where the rules can be more restrictive. For this reason you can obtain money and eventually additional money based upon your track record and performance with a particular Hard Money Lender.
After Repair Value (ARV) – This is what the property would be worth after your rehab is competed and this value is normally determined by appraisers that work with your hard money lender. Normally Hard Money lenders will loan 65 of the ARV. This is how it works
if you buy a home for $100,000 you can borrow $65,000, 65 of that amount or $130,000, now you have money to buy the house for $100,000 and pay for your rehab.
Escrows- This is money that is held by a 3rd party, normally a Title Company, for a specific purpose. In the case of Hard Money Lending they would escrow your repair money and in some instances they would escrow your first couple of payments. This is done to ensure that the work on the property is actually completed. When you first apply for your Hard Money Loan for a specific property you would prepare a work sheet of what needs to be done and the cost of that work. This would be used to set up your escrow account.
Draws- The way the money for repairs is disbursed is by using draws. The Hard Money Lender would physically inspect the property to ensure the work was actually done and disburse the money accordingly. The money is not released all at once, rather in gradual portions as the work is completed. Each portion is a draw.
When & Why- There is a time a place to use Hard Money Loans. Normally for Soft Money to be used the property needs to have a roof, windows, doors, floor coverings. If the property does need some work this is called deferred maintenance. This would be noted by the appraiser when the appraisal is done. Traditionally if this number is over $2,000 you would not be able to receive a Soft Money Loan. The other reason investors use Hard Money Loans is so they do not need to use any of their money or to personally fund their project. As you can see a good portion of the properties an investor buys would be financed with a Hard Money Loan. This is due to the fact that most foreclosed properties are not well kept. However, there are always exceptions to this.
Funding Circle for Business Loans
Peer-to-peer lending sites are still a growing phenomenon in the UK. Their publicity efforts tend to centre on their benefits for investors, mainly the relatively high interest rates they offer to savers. The success of the sites depends on winning over lenders looking for a home for their savings: there is less material out there about their advantages from the point of view of borrowers.
Its assumed that potential borrowers, particularly business borrowers, will find their own way to the sites with minimal encouragement, given the tight credit market of recent years.
If you run a company thats in need of investment, the financial climate isnt easy. Its hard to get backing from the banks, even for small loans. What are your options? Of the top three UK peer-to-peer sites, the biggest one for business borrowing is Funding Circle (FC).
Who can borrow through Funding Circle?
A business is eligible to apply for a loan of between £5,000 and £1,000,000, if it
* Has a turnover (not profit) of over £100,000 per annum
* Has filed accounts at Companies House for at least two years
* Is a limited company or LLP, not a business run by an individual or a partnership
The loans are repayable over a period between six months and five years. A personal guarantee for the loan is expected in all cases, and for larger loans over £100,000, the site requires security to be given, either on a specific asset to be bought with the loan proceeds, or generally over company assets.
How does it work for borrowers?
A business needing to borrow must initially complete an online application. Funding Circle estimates that should take about 20 minutes. They aim to process the information, complete routine checks, and revert to the borrower with a decision within two days.
FC will do a credit check with Experian, and will also check with CIFAS as to whether any fraud has been recorded in connection with a company director.
The borrowers proposal may be accepted or rejected outright, or Funding Circle may request modifications in the terms or the security required. In some cases, the company may be restricted to borrowing a smaller sum that they had intended. Depending on FCs assessment of the borrowing companys financial strength, and the degree of risk in lending to them, the loan request, once accepted, will be assigned a risk band which determines the range of interest rates allowed for the loan. The rates range between 7.2% and 11.5%, as at November 2013.
Once agreement has been reached on terms, the loan proposal will appear on the FC website, with information about the companys credit rating, accounts, and the purpose of the loan, together with details of any guarantee and/or security.
Within the assigned risk band, lenders can offer to lend money at their chosen rate, which is driven down in a reverse auction as successive lenders place their bids. The more popular the lending proposition, the quicker the interest rate will go down. It usually reaches the minimum for its particular risk band, but may not do so if the proposal doesnt appeal to the lender members of the site.
Appealing to lenders
To ensure the best chance of your proposal attracting the lowest interest rate for its band, make your proposal full and convincing. Describe your company mission and values, and explain why you need the money as precisely as possible.
Make sure that any issues with your credit score have been resolved with Experian as far as possible, as the company credit rating is very important to lenders. Above all, answer their questions as promptly and fully as you can, even when, as is sometimes the case, they are phrased less than diplomatically. Far fewer people will lend on a proposal with unanswered questions outstanding, or with questions they think arent answered fully.
After the auction
When the loan is fully funded, usually at the minimum rate for the band, the borrower must decide whether to accept the proposal or not.
If its accepted, the loan, consisting of 10s or 100s of small slices coming from individual investors, will be administered by FC who will distribute the repayments between the investors and chase up late payments. They will be responsible for collecting the debt through the courts if necessary, and will enforce any guarantee or security, should the loan go bad.
If you are thinking about borrowing through Funding Circle, its a good idea to get familiar with the website and watch a few auctions first. You can get an idea of the process and also the sort of questioning you may face from potential investors.