Investors use hard money loans for several different real estate transactions. often, it’s the quickest path to securing a loan.
The main advantages of Hard Money are:
Speed and flexibility
Sometimes this can outweigh the drawbacks of hard money loans. Hard money lending can get complicated quickly, so you need to realize what you are getting into before making decisions to invest with hard money.
Hard money loans are asset-based loans.
They are primarily used in real estate transactions. A borrower receives funds and the loan is secured by real property and used as collateral. The collateral reverts to the hard money lender if the borrower defaults. It is called “hard money” because borrowers are charged a higher price in both interest rates and orientation fees.
Paying a Hard Money Loan Back
Hard money loans are also harder to pay back compared to soft money loans A hard money loan is funded by private investors as opposed to conventional lenders such as banks or credit unions. The terms of hard money loans are usually short. They are typically 6 months to 3 years. Long-term hard money loans are best to be avoided due to the high interest.
Retipster.com states, “Unlike traditional bank loan criteria, the ability to obtain hard money financing isn’t determined based on the borrower’s creditworthiness.” Instead, hard money lenders use the value of the property itself in determining whether to loan the funds. The property may be one the borrower already owns and wishes to use as collateral or it may be property the borrower is acquiring.”
Hard money lenders are licensed differently than traditional financial institutions and are typically regulated at the state level. Banks have certain non-negotiable criteria that borrowers must meet before issuing a loan. Hard money lenders operate with less regulatory scrutiny, allowing them to look at all merits of a loan.
For instance, hard money lenders are able to look past employment length, income history, and credit scores. Hard money loans are often funded more quickly than traditional loans; in most cases, funds are ready in a week. Bank loans take at least 30-45 days.
Circumstances Where Hard Money Loans are a Good Option
There are circumstances where hard money loans may be a good option for financing a transaction.
Situations Where Cash is Needed: Enticing a seller with a cash offer can be advantageous. This approach is ideal for investors looking to acquire bargain deals or distressed properties.
When Financing is Needed Immediately: Investors can move quickly to secure time-sensitive deals. Closing with efficiency allows for the opportunity to close more deals in a shorter period of time. This is an invaluable asset to an investor.
Another situation is when Your Credit Isn’t Up To Par: Banks and credit unions are generally less willing to work with investors that have less than perfect credit. Hard money loan lenders will make loans that traditional financing institutions would typically pass on.
The situations that are ideal for hard money loans are:
House Flipping: This is also referred to as “fix and flips”. Real property is owned just long enough to increase the value. The property is altered (rehabbed) to increase the value
Land Loans: Borrowers use funds to purchase land Typically real estate is built on the land. Construction Loans: This is a short-term loan used to finance the construction of real estate investment property.
Bridge Loans: Bridge loans are used to sellers who want to buy a new home before selling an existing home but need the cash from the existing home. It’s just important to note that Hard money loans do not suit every investor or every type of deal.
When considering hard money loan as an option, it’s imperative to be armed with enough knowledge so that a decision is made with confidence. If you want to learn more about hard money lenders, browse our website.