How Much Are Closing Costs for Residential Hard Money Loans? Points, Rates, Fees And Formulas
So you have found the perfect house to fix and flip or maybe you’re going to fix and hold the property. But now you need to figure out the best way to finance it. How much is this loan going to cost? Do you want to use your own cash? How much cash do you want to keep in your pocket?
At Carolina Hard Money we have been answering these questions no less than 5 times a day for investors just like you, helping them navigate the financing for projects. We take the time to listen to and guide you to success not just providing lip service with fees and rates. We care so much about your success that we offer you an hour long session of free mentorship. Your free session is individualized just for you and your goals as an investor. Spend an hour on Wednesdays with Wendy. Book your time here.
As you continue your search for the hard numbers, you will realize there’s no easy way to answer the cost question. Most often, you’ll want to know what interest rates are and what are the points that a lender charges to close a hard money loan.
The truth is that points and interest rates vary widely among private money and hard money lenders. In addition, costs are not just about fees, rates and points. Costs also include time, ease, relationship, speed of the closing and the ultimate headache factor. Is the lender you are working with going to do what they say they will do?
A good rule of thumb is that about 8% of your total loan amount is going to be standard closing costs.
I will explain that 8% rule in detail in just a moment. Currently, we charge 3 1/2 points on your first loan and a 10.99% interest rate on a six-month term. The real question you should be asking though is: what is this loan going to cost me?
That is really what you need to know as a borrower. You want to know exactly how much out of pocket money you’re going to need to make this deal work. Whether you are working on a new construction property, a rehab property or just a vacant lot you really just want to know all of the costs involved so that you can determine what your profit is going to be. First, we must take a look at all the factors that determine how much money a loan is going to cost?
After reading this article you will have a better understanding of all the factors that should be considered when taking on a hard money loan. You will know the hard costs but you will also get a better idea of complete costs, including financially, mentally, and physically.
What Are The Factors That Determine The Cost Of A Hard Money Or Private Money loan?
Investors should know that rates and points make a difference in the cost of a loan however all of that is subject to the amount the lender is willing to lend on the property. A loan amount is always based on after repair value and the loan to cost. All the other fees to consider are due diligence and lender fees, junk fees and attorney fees and then finally, consider the 8% rule.
What Are The Interest Rates And Points Charged On A Hard Money Or Private Loan?
Interest rates and points vary among lenders and depend very much on where the lender is located. For example, in California and the West Coast, interest rates tend to be lower than anywhere along the East Coast. It usually depends on how many lenders are in your area trying to get money placed in the market.
It also can depend on whether you are working with a broker, a lender who lends his own money or fund, or what we refer to as an institutional lender who is lending money from very large hedge funds and Wall Street type companies.
The larger Wall Street type companies have much lower rates, but they also have much tighter guidelines in which they must adhere to in order to lend. Lenders want borrowers with credit scores that are well over 720, with houses that are located in top tier cities with large population counts and the rehab can only be a small percentage of the total cost of the project. These lenders do not get to make their own decisions.
Institutional lenders make lending decisions based on what the bean counters on Wall Street are allowing them to do. They tend to have a lot of money, millions and billions, that they need to get placed therefore giving out lower rates to get a return for their lender investors.
Companies that lend their own money or out of their own fund can make decisions based on their own criteria. They may charge a little bit more on their points and their rates, but they also are going to be able to lend you more money and be able to lend on more unique properties and locations that don’t fit into the “normal” range. These self funding companies are the lenders that will be able to lend to you if you are in a second-tier city or out of the city limits on the properties that you are borrowing on.
Finally, we have brokers. Brokers are independent people who don’t actually have any money but they will basically connect you to lenders for a fee. Brokers can be good if you are looking for someone who can shop for you and find you different options. However, be prepared to pay a little more because they need to get paid as well.
What Is The Loan To Value A Hard Money Or Private Money Lender Is Willing To Lend?
In the investor world lenders normally lend based on the after-repair value of the house. They will take your list of repairs or the plans you are using to build a house with, then give it to an appraiser and do what is called a subject to appraisal. It is based on what the house would be worth once it is completed. Lenders will base their loan amount off that appraisal.
For example, we lend up to 65% of the after repair value. So, if you are rehabbing a single family residence that is worth $100,000 once it is completed, we would lend you $65,000 for that project. The cost of your loan is based on that $65,000.
- The points are a percentage of your loan amount. In some cases, the interest rate will be based on the loan amount as well.
- A lower loan amount will normally have a higher interest rate.
- The term of the loan can also vary depending upon the lender. I have seen them from three months to 18 months for most hard money lenders, on average they are 12 months in length.
- Most interest rates are based on a 12-month annualized count.
You take the loan amount, multiply it by the interest rate and divide that answer by 12 months to come up with your monthly payment.
65000 (loan amount) x 10.99% (interest rate) divided by 12 (months the loan is amortized by) = 595.29 per month payment
This formula works for every interest only loan you will ever do. All you need are the variables such as the interest rate, the loan amount and the number of months they are amortizing the loan for. It has nothing to do with the length of the loan. Are they going to calculate it based on 12 monthly payments?
When shopping for rates, we always remind people that the percentage of interest rate isn’t all that matters, whether it’s 8% or 15%. What matters is how many times you make that payment. If you are working quickly and it’s a three-month loan at 15% that is a pretty inexpensive loan. The longer-term your loan is the lower you will want your interest payment to be.
What Is The ARV Or After Repaired Value Of A House?
The ARV or After Repaired Value of the house or project is just a fancy way of predicting what the project will sell for when it is completed. Some lenders will get what it called a Broker’s Price Opinion or a BPO. That is when a real estate agent or broker will go to their multiple listing service software and pull up comparables that have sold within the last 6-12 months and within 1-3 miles of your house. They try to make sure the square footage and years built are very similar to your project as well as amenities like carports, out buildings, garages and even style of the homes.
Appraisers do the same, however they are trained to be even more meticulous with the choices of comparables they pick. Their reports will include exterior and interior pictures of the projects as well as exterior pictures of the comparables. They include days on market, details about the closing and the neighborhood trends.
Both opinions are guided by the use of the intended rehab list or plans for the build or project.
What Is The Loan To Cost A Hard Money Lender Is Willing To Lend?
The loan to cost is really based on the purchase price and the rehab amount. Some lenders will require that you bring 10 to 20% of the purchase price and or 10 to 20% of what the rehab cost is for your project or both. A lender will publish their loan to cost at 90% of the purchase or 90% of the rehab.
What this means is that they want you to bring 10% of the purchase price and/or rehab amount. That is in addition to any closing costs that are required. All lenders are different so make sure you’re always asking about the loan to cost.
What Are Due Diligence Fees And The Lender Loan Fees On A Hard Money Or Private Money Loan?
There are other fees that you’ll be charged as a borrower. Some are flat fees, and some fees will depend on the loan amount.
- Flat fee charges include an appraisal, inspection, title search, title binder, application fee, underwriting fee, processing fee, and servicing fee.
- Fees that depend on the loan amount are the title insurance, hazard insurance, or builders risk insurance and sometimes the appraisal can vary depending on how large the house is or whether it is multifamily!
- Title search
- Title binder
- Application fee
- Underwriting fee
- Processing fee
- Servicing fee
- Title Insurance
- Hazard Insurance
- Builders Risk Insurance
Keep in mind that most of these fees are subject to the lender and the attorney or title company as to whether they will charge them, and some fees are just lumped into one bulk fee. Now you have a list that you can ask about when shopping for a loan.
What Are The Attorney And Junk Fees On A HUD For Hard Money Or Private Money loans?
Attorneys and title companies work hard for their money and deserve to get paid for what they do. Making sure you have a clear title is paramount to your ownership. Some of those fees will include doc prep, recording, tax stamps, wire fee, copy fee, overnight fee, even an email fee. OK, that one’s kind of ridiculous but I have seen that too!
In addition, you may see a credit fee or a background check fee on the HUD, that one is probably coming from your lender. The recording fees and the tax stamps are hard costs as well as taxes. Pay unto Caesar! Some of the others are a bit questionable but you still should ask about them. In some cases, you may be able to negotiate these fees. If you don’t ask the answer is always no.
The 8% Rule Of Thumb For Hard Money Closing Costs
When I get the question on a daily basis, “how much will the loan cost?” I always tell people about my 8% rule of thumb. I always suggest that the borrower take the total loan amount and multiply it by 8% and that will be a good idea of what you will bring to the table in closing costs.
In addition to that, you will bring the difference of the loan to cost. If the lender lends 90% of the purchase or 80% of the purchase or even 90% of the rehab, you the borrower will be bringing that 10 or 20% difference on top of that 8% rule of thumb.
There are some lenders that will allow you to fold all of that into the loan amount. That really works well if you are in the deal at about 50% of the ARV or lower. You should also ask whether you will have to escrow payments in advance that the lender will hold. That would be an additional chunk of change.
For example, for a loan where the after-repair value is $120,000 x 65% = $78,000 is the loan amount. Taking that $78,000 and using the 8% rule would give us $6240. This would be your closing costs without any down payment or difference in loan to cost that you would have to bring. But it does cover just about everything else that shows up on the HUD.
So, What Is The Cost Of Closing A Hard Money Or Private Loan ?
You have hung in there with me through this article for a great reason. You now have the understanding that the cost of closing a hard money loan is not a simple answer. Your challenge now is to take all this information and figure out what is the best financing option for you and your project.
The cost is going to be different for you for each project that you do and with each lender or type of financing you chose to go with. Having a variety of financing options and tools in your finance toolbelt to choose from is what will make you successful as a real estate investor. With each new project you enter into and finish, you will improve your efficiency and relationships with lenders. You will find that as lenders get to know you and gain confidence in how you do business, they will begin to offer you options and alternatives that only come with experience and trust.
Obviously, the cost of doing a loan depends upon the lender terms. It is up to you to determine which lender terms are best for your particular project. Lowest rates may not necessarily be the lowest cost to you. Determine the true length of time that you’re going to need the loan and how much money you’re willing to bring out of your pocket at the closing table.
You will also find that the cost of closing a loan will always be a moving target. New lenders will enter the market with new products and other lenders will go out of business and lose products that may have worked well for you. It is important to always look for new tools to add to your arsenal of loan products.
If you are using Carolina Hard Money for your loan you will pay 3 1/2 points on your origination fee for your first loan with us. We also charge a $1,585 application fee, and a $600 servicing fee. We do not charge for the credit check or background check or mail away or copies or bathroom break fees. The only fee you pay outside of closing or in advance of closing is the appraisal fee and that goes directly to the appraiser. Appraisal fees are based on what the appraiser charges and it also depends on the size of the house, but they range between 350 and 550. In some cases, they are higher but that’s very unusual. We don’t require that you bring money in escrow for prepayments and we don’t have any prepayment penalty, So if you get your house completed in three months rather than six months, you pay off early and we’re all happy. If you are interested in seeing just what you will qualify for you can watch this next video (hyperlink) or if you would prefer to skip ahead and see what the step-by-step process is like from application all the way to pay off you can watch this video (hyperlink). If you have other questions that I have not answered here, then jump over to this article that answers the top 80% of the questions that we answer for Borrowers every day.