Stefan  Ryzwanowicz

Stefan Ryzwanowicz

Sales Representative

Royal LePage Signature Realty, Brokerage

Mobile:
416-877-5588
Office:
905-568-2121
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Private Mortgage Lending and Hard Money Loans

Investing in real estate can be profitable, and house-flipping is a popular way to ensure a better return on that investment. But it costs money to renovate a house -- money that you might have already spent purchasing the property.

 

If you’re planning on “flipping” a house (that is, purchasing a cheap fixer-upper and renovating it in order to sell it for a higher price), or even if you just need a bit of quick cash to cover an emergency expense or repair, a hard money loan might be the answer.

What is a Hard Money Loan?

A hard money loan is a short-term loan that is secured against real property. Most hard money loans are short term (think 1 to 3 years), and take the form of smaller lump sums designed to fund activities such as renovations by real estate flippers, or repairs by property owners who don’t necessarily live in the property they are borrowing against. 

 

While other types of loans, like traditional mortgages and Home Equity Lines of Credit (HELOCs) are also secured against property, these types of loans are more regulated, and their security depends on both the property value and the borrower’s credit history.

 

Hard money loans are lent based on property value and Loan-to-Value ratio, rather than the credit rating of the borrower. For this reason, they can be riskier than traditional mortgage or home loans, and usually come with higher interest rates and additional fees. Interest rates for hard money loans in Canada can be between 7 and 15 percent, while the average interest rate for prime mortgages in 2019 was just over 5 percent.

 

Though these loans are higher cost and riskier, they do offer a few distinct advantages, especially if you’re only looking for short-term funding. Since hard money loans often don’t require a credit check, the time from application to approval is a lot quicker than with traditional mortgages. In addition, since these types of loans have less regulatory oversight than other types of home loans, and are usually approved on an individual, case-by-case basis, lenders of hard money loans can offer a bit more flexibility in terms of repayment schedules.

What is Private Lending?

A private lender (sometimes referred to as an independent or alternative lender) may be an individual or a company with access to a private pool of investment capital. Since private lenders aren’t held to the same federal lending standards as banks, they can often offer more flexible loans, as well as types of loans that banks would consider too risky -- like hard money loans.

What Kinds of Private Lenders Are There?

Private lenders are usually one of the following: individuals, syndicates, or mortgage investment corporations (MICs).

 

An individual lender is a single person with independent capital. A hard money loan from an individual will come entirely out of that person’s pocket. This can be a good option for flexibility, though you may not be able to borrow as much as you might from a company.

 

Syndicates and MICs are both groups of investors. A syndicate is a smaller group, in which the individual investors all have the choice of which mortgages or loans they want to fund. An MIC is a much larger group of investors who pool their capital and then collectively decide to approve or reject loan applicants. An MIC has the lowest risk for individual investors, however, it may be somewhat less flexible as borrowers must go through a more standardized approval process.

How do You Qualify for a Hard Money Loan?

With hard money loans, the lender’s incentive comes from their ability to collect high interest fees, and the relatively short turnaround time of the loan. Though these loans are riskier to the lender on paper, in many cases a lender still stands to profit even if the borrower defaults. Hard money loans are small, which makes them easy to recoup by reselling the collateral property, and the resale process is made easier when the property is not currently occupied.

 

To qualify for a hard money loan, all you really need is to own a property with an LTV of around 50 to 70 percent. The more equity in your property, the better your chances of getting approved for a hard money loan. It’s also good to keep in mind that some lenders have specific restrictions against hard money loans secured against property that is currently occupied, as this adds to this risk by complicating any resale proceedings that may occur.

 

If you’re planning to apply for a hard money loan, the best place to start is with a reputable mortgage broker or advisor who can help you determine whether a hard money loan is your best option, and if so, avoid predatory lenders and potential pitfalls.

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