Hard Money Loan Rates: 3 Factors That Determine Your Rate

Michael Jarrett

Unlike traditional mortgages, hard money loan rates fluctuate frequently. Rates are impacted by both the macro-economy (e.g. COVID) and the micro-economy (e.g. your circumstances). In this article, we will look at how the secondary market and borrower variables impact hard money rates.

Interest rates from private lenders —also known as hard money lenders— vary drastically depending on the nationwide economy, local economy and the borrower situation. You can't control what is going on in the broader economy and it's difficult predict the future of the economy. However, you can keep a close eye on the factors of the economy and your project that matter most to the loan rates. Below are the three factors to focus on prior to applying for a fix and flip loan.

1. The Secondary Market

Most fix and flip loans are sold to secondary market buyers (pension funds, wealthy individuals, private equity groups, hedge funds, etc.) shortly after they are underwritten in the primary market. This process provides primary lenders with more capital to lend while shifting some risk (and profits) to the secondary market loan buyers. Since the secondary market buyers end up with the loans in the long-term, they often determine the borrower requirements and rates for primary lenders.

2. Current Hard Money Interest Rates

Fix & flip loans traditionally have high interest rates & short terms. The average rates vary between 6% and 15%, but some can even go as high as 20% for high risk borrowers. These rates change depending on the outlook and strength of the economy. COVID-19 weakened the U.S. economy throughout 2020 which led many secondary market buyers to reduce their loan purchasing commitments. This influenced the primary market to tighten-up their lending policies, resulting in higher interest rates for borrowers ranging between 9% to 15% (as of September 2020). Luckily, the secondary market & primary market are both easing back to normal as time goes.

3. Your Project

The most important components for determining your project's interest rate is the property's potential based on the purchase price, required investment, and expected return. Fix and flip borrowers often use their project's property ownership as for loan collateral, meaning, when a loan defaults, the lender is stuck with the property. So lenders almost always ensure that the a property has inherent value or high potential prior to underwriting a loan for a borrower.

  • Your Cash - One way to make your fix and flip deal more attractive to lenders is to have a large cash stockpile as reserves for the deal. The last thing that a lender wants to get themselves into is a situation where the borrower is asking for more money to complete the project or for accelerated draws on the construction piece of the loan.
  • Your Credit Score - Maintaining a good credit score is a practice that is always recommended for your personal life and business finances. Typically if your credit score is above 680, a hard money lender will work with you without requiring much up-front cash. And if your credit score is above 720, then you have a high chance of obtaining a low interest for your fix and flip real estate project.
  • Your Real Estate History - Inexperience fix and flip real estate developers often have to pay premium interest rates due to their perceived risk. Alternatively, developers who have multiple fix and flip deals under their belt will find that lenders may compete for their business which since the perceived risk is much lower.

First time developers are often turned off by the sight of interest rates for fix & flip loans that are 10% or higher. However experienced borrowers know that high interest rates are extremely common, especially when a project is intended to start and end within a few months. So it's best to worry less about the interest rate and more about your ability to execute on your project to gain more credibility.

Whether you are a first time borrower or experienced fix and flip real estate developer, Joist wants to work with you. Find out what rates you qualify for using our fast & easy loan application on our website.

Previous blog Post ➡️