Hard money loan questions, answered by a Gatlinburg lender

A hard money loan is a short-term, business-purpose loan secured by investment real estate and funded by private capital instead of a bank. It is approved mainly on the property and the deal, such as the purchase price, the renovation budget and the value after repairs, rather than on your income or tax returns. Investors in Gatlinburg and East Tennessee use hard money to buy, renovate, build and refinance property quickly.

The lender funds part of the purchase price at closing and holds the renovation budget back, releasing it in draws as each stage of work is inspected and completed. You make interest-only payments during a term of 6 to 24 months, then repay the loan when you sell the property or refinance it into a long-term loan.

The terms overlap. Hard money usually means a professional lender with set programs, underwriting and draw processes, like Optimus Capital. Private money often means an individual, such as a friend, relative or local investor, lending on negotiated terms. Both lend on the property rather than your income.

A bank approves the borrower: income, tax returns, debt-to-income ratio and the number of mortgages you already have, and it often will not finance a property that needs major work. A hard money lender approves the deal, closes in days instead of weeks, funds renovations and has no limit on how many loans you hold. The trade-off is a higher rate and a shorter term.

Fix and flips, buying and renovating a rental to refinance later (BRRRR), ground-up construction, finishing a stalled project, buying at auction or on a tight deadline, bridging until a long-term loan closes, and pulling cash out of property you own free and clear. It is for investment property only.

No. Hard money loans are business-purpose loans for non-owner-occupied investment property. For a primary residence or second home, a conventional or government-backed mortgage from a licensed mortgage lender is the right choice.

It is a good tool when speed, renovation funding or flexible approval makes a profitable deal possible and you have a clear exit: a sale or a refinance. It is a poor fit when the numbers only work at a bank rate, when the exit is uncertain, or for a home you will live in.

With strong credit, as little as 10% of the purchase price: we lend up to 90% of the purchase and 100% of the renovation budget at a 720+ credit score, as long as the loan stays within 70 to 75% of the after-repair value. Lower scores need more down. Plan separately for closing costs and reserves.

Our programs start at a 600 credit score. The best leverage, 90% of purchase and 100% of rehab on a fix and flip, is for scores of 720 and up. Scores below that qualify with lower leverage and adjusted pricing.

Often, yes, if your score is 600 or higher and the deal is strong. Hard money lenders focus on the property and the plan, but credit still sets leverage and pricing, and recent foreclosures, bankruptcies or mortgage late payments can limit options.

We do not. There are no tax returns, pay stubs or debt-to-income ratio. We look for enough cash to close and carry the project, a property that supports the loan, and a credit history that shows debts are paid on time.

ARV means after-repair value: what the property should be worth once the planned renovation is finished, based on recent sales of comparable renovated properties. Fix and flip loans are capped at a share of ARV, typically 70 to 75%.

Loan-to-value (LTV) compares the loan to the property’s current value. Loan-to-cost (LTC) compares it to what you spend on the purchase and the work. Loan-to-ARV compares it to the value after repairs. A fix and flip or construction loan usually has to fit inside both a cost limit and an ARV limit.

It is a rule of thumb that an investor should pay no more than 70% of the after-repair value minus the repair costs. On a $400,000 ARV with $60,000 of work, that is $220,000. It leaves room for financing, holding and selling costs and profit, and it lines up with how lenders cap loans at 70 to 75% of ARV.

Yes. First-time investors qualify, and with a 720+ credit score they are eligible for full leverage. Experienced investors with 5 or more flips in the past 2 years get a shorter process, without an inspection or appraisal, up to 75% of ARV.

Yes. Most investors close in an LLC. We need the articles of organization, the IRS EIN letter, a signed operating agreement showing each member’s share and, for an older LLC, a certificate of good standing. Members usually sign a personal guarantee.

Yes. We lend to investors who live outside Gatlinburg, and to foreign nationals through our rental loan programs.

It is how you will repay a short-term loan: usually by selling the renovated property or by refinancing it into a long-term rental loan. Lenders ask for it upfront, and a backup exit, such as renting if the sale market slows, makes a deal stronger.

Buy, rehab, rent, refinance, repeat. You buy and renovate with a hard money loan, rent the property out, then refinance into a long-term DSCR loan that can return much of your cash, and use it on the next deal.

Yes. When the renovation is done and the property is rented, a DSCR rental loan can pay off the hard money loan, with a cash-out refinance at up to 80% of the new value.

A DSCR loan is a long-term rental property loan approved on the debt service coverage ratio: the rent divided by the full monthly payment of principal, interest, taxes, insurance and association dues. It does not use your personal income. We prefer a ratio of 1.0 or higher and lend up to 85% of the purchase price.

It is a loan for a renovation or build that has already started and needs more money to finish. It is sized on the property’s current as-is value plus the remaining cost of work.