With Covid-19 impacting every sector of the lending environment, including private money lending, there have been some critical changes over the past few months that have affected the cost of financing a real estate investment project. For this reason, it is more critical than ever to perform your due diligence when deciding on a hard money lender to partner with for your fix and flip and new construction loans. Having a clear idea of your lender’s rehab and construction loans, rates, terms, and policies is crucial.
Hard Money Construction Loans Rates and Terms
Fortunately, single-family home prices and home sales have not been as drastically impacted as forecasters feared earlier in the year, and there are many real estate markets around the country that have remained strong even as the economy has staggered. House flippers and real estate investors have been busy in 2020 providing much-needed inventory for home buyers, and as local real estate markets adjust to fluctuating economic conditions, hard money lenders are surveying the economic landscape and adjusting their strategies for meeting the construction financing needs of their borrowers while mitigating their own risk and remaining in business.
Loan-To-Cost (LTC) Limits May Be Affected by Covid-19
The plain truth is, many fix and flip and new construction hard money lenders did not survive the sudden challenges brought on by the Covid-19 pandemic and they have either shuttered their doors or drastically scaled back lending to wait out the crisis. Other hard money lenders have slowed the release of construction draws due to their capital sources drying up, while others, such as Anchor Loans, have solid sources of capital in place that allow them to remain fully operational.
It is important that you research hard money lenders before deciding on a construction financing partner, as there are significant changes in the industry that may affect your ROI. For example, some lenders are only approving construction loans for the most experienced and qualified borrowers— with Loan-To-Cost (LTC) limits significantly lower than what was available just a year ago. In some cases, a borrower with a strong equity position in a property who could expect 70-80% LTC last year may find a 60-70% LTC limit in today’s COVID-19 lending environment.
Higher Hard Money Construction Loans Rates and Fees
Many construction lenders that are still originating hard money rehab and construction loans have had to increase interest rates and loan fees to mitigate losses associated with the economic uncertainty brought on by the coronavirus. Prospective borrowers who were paying 8-10% interest rates on hard money construction loans for their projects last year should be prepared to encounter interest rates ranging from 8-15% in the current lending environment.
Know Your Hard Money Lender’s Policy for Late Loan Payments
A hard money rehab or construction loan is an asset-based loan, meaning your property will serve as collateral on your loan. Depending on which U.S. state your property is located in, you will sign a Deed of Trust and a Promissory Note giving your lender the right to foreclose and sell your property if you default on the loan. In some states, a foreclosure must be executed in a courtroom through a court process.
It is important to keep in mind that a legitimate hard money lender is not a “loan shark” eager to see your project fail so they can take your property. On the contrary, be sure to choose a licensed, dependable hard money lender who views your success as their success and sees you as a potential long-term partner. Before signing on the bottom line on a hard money fix-and-flip loan or construction loan, know in advance what your lender’s late payment policies are, and what mitigation is available to help you avoid default should you fall behind.
