Step 1: Know The Home's Purchase Price
First, find out the home’s purchase price or determine the amount you’ll bid. This is the base amount of the transaction. You won’t borrow this full amount since you’ll need a down payment, but it’s the basis of the calculation.
The home’s purchase price determines your loan-to-value ratio once you know how much you’ll put down. It also determines your interest rate and loan terms. Finalize this number as much as you can.
Step 2: Determine the Repair Costs
If it’s a rehab home, work with a contractor to determine the cost to fix up the home. This should include all costs for the contractor, materials, permits, contingency funds, and any other costs you may incur.
It’s important to work with a reputable contractor so you know the true costs of fixing up the home. It’s easy to estimate yourself, but what if you overlook something or don’t realize the true cost of a repair or renovation?
Step 3: Find out the hard money loan costs
In most cases, it is easiest to use a hard money calculator to work out the loan costs. You should also take note that these are some of the most common costs associated with hard money loans.
- Origination points – This is a percentage of your loan amount. For example, if the lender charges 3 points, that’s 3 percent of the loan amount. On a $200,000 loan, that’s $6,000.
- Interest – Look at the interest rate and figure out how long you’ll own the home. If it’s a fix and flip, you’ll own it for a short time. If it’s a buy and hold, you’ll have it longer. When you use a hard money calculator, estimate your hold time because you’ll get a more accurate picture of the interest costs.
- Title costs – Ask about costs for a title search and title insurance. Even if you keep the home for only a few months, the lender needs title insurance to protect their interests.
- Appraisal costs – You’ll need an appraisal on the property so the hard money lender knows how much they can lend you. Typically you need a 10% or higher down payment and they’ll loan on the rest. This means a 90% loan-to-value ratio.
- Finalize your down payment. Every hard money loan requires a down payment. The more money you invest, the better terms they may offer. In other words, the more money you invest, the less risk of default they take. They may offer lower interest rates or origination fees because of the lower risk.
Your down payment is the basis of your upfront costs or costs you pay at the closing. Make sure it’s a number you can comfortably afford.
Borrowing hard money is one of the fastest ways to buy rehab homes, especially foreclosures. If you need money fast because the competition is fierce or you’re buying at a foreclosure auction, consider a hard money loan.
You can receive approval almost instantly and get funded within 7 days, in some cases. This gives you the leg up on the competition. When you have funding ready, sellers are more willing to accept your offer rather than waiting for bank financing from another buyer.
Know the full cost of borrowing a loan (any loan) before deciding. The total loan costs figure into your overall profits, so consider them carefully. Invest as much as you can in the home and provide good qualifying factors to secure the best terms and keep your loan costs down.
Final Thoughts
Hard money loans provide funds needed to buy a home fast. Whether you’re fixing and flipping or buying and holding, you need financing fast before someone else snags the deal. Hard money loans offer fast financing because they focus on the property, not the borrower.
Many hard money loans are affordable, and a great way to start or continue real estate investing. Knowing the total cost of the hard money loan helps you make the right decision.
Follow these steps to calculate the costs to borrow hard money.