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5 Reasons Why Real Estate Investors Use Hard Money Loans

5 Reasons Why Real Estate Investors Use Hard Money Loans

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Are you a newbie real estate investor, looking for short-term financing options to purchase an investment property? Does the ‘hard money loan’ sound risky to you? Gone are the days when shady looking loan lenders worked under the “loan-to-own” concept. Today, you can use the services of a reputable hard money lender to help you complete a speedy purchase and transfer of real estate.

Let us learn more about what hard money loan actually is.

What is a hard money loan?

A hard money loan is a method in which real estate investors borrow money from individuals or other investors instead of the traditional mortgage lenders. Money is usually lent on the basis of the property you’re purchasing, where the property acts as collateral.

Since hard money lenders lend money based on the collateral securing the loan, they are not as finicky about your ability to repay the loan. If you are unable to repay the amount at any point, hard money lenders plan to take the collateral and get their money back by selling it. Hence, the value of the collateral is of more importance as compared to your financial stability.

Where traditional lenders are painfully slow in approving a loan, then hard money may be the only feasible option for some people. Hard money loans are usually short-term and last anywhere from one to five years. It is best to repay them within the mentioned time span, because of the high-interest rates of hard money loans as compared to traditional loans.

Since hard money lenders are willing to take a higher risk as compared to bank loans, the interest rates are almost 10-15% higher than conventional loans. Points may vary anywhere between 2-4% of the total money loaned. But the key deciding factor for interest rates and points is the loan to value ratio.

Make sure you do complete research before getting a hard money loan. The interest rates and points fluctuate from lender to lender and also from region to region. For example, hard money lenders in California have a lower interest as compared to other parts of the country since California is a hub for hard money lending firms. So, wherever there is increased competition among hard money lenders, you’ll witness a decrease in interest rates.

Why Use Hard Money?

You must be wondering, if hard money has such a high-interest rate, why should you use it? There are many benefits of a hard money loan, especially for certain borrowers who are not capable of meeting the standards of conventional bank loans when they need it the most.

Here are some reasons why you should go for a hard money loan if you are planning to invest in real estate:

1- Faster Approvals:

Let’s face it, one of the greatest benefits of a hard money loan is that it is a fast process. In fact, investors can get the pre-approval within one or two days, if all the documentation is complete. Since the lender is mostly concerned about the collateral, they don’t spend ages reviewing your income and bank statements.

Plus, when you develop a mutual relationship with a lender, the process can even move forward more quickly, giving you the ability to close more deals successfully.

2- Flexible payment schedule:

A good relationship between the investor and the lender also paves the way for more flexible and customized repayment plan. This element of customization lacks within a big financial institution, where you have to follow the plan dictated by the bank.

3- Minimal requirements:

It’s no secret that conventional bank loans require a bucket load of documents and many hard-set elements like income details, credit history, experience, etc. That is why bank approvals can become a painful process.

Fortunately, a hard money lender will not burden you with so many requirements. As long as you are eager to invest in a high-value asset with at least 20% equity stake in it, chances are that you will immediately qualify for the desired loan.

4- No prepayment penalties:

If you apply for a loan from a bank, then you might be required to pay prepayment duties if you pay off the loan before the maturation dates. Fix and flip lenders won’t charge prepayment penalties. So, if you have the extra cash at any point in time, you can pay off your loan confidently without worrying about paying the penalty.

5- No credit history required:

Whenever you apply for a loan through a bank, your credit history can either make or break their decision. But with private lenders, you can still manage to get a loan even if you have a weak credit history and foreclosure.

The reason behind this is that a hard money lender is more interested in the property value, borrower equity, etc. As long as your investment fulfills the criteria, there is a good chance that you can secure a loan.

Conclusion:

Hard money loans work best for short-term loans. Note how fix-and-flip investors own property just long enough to make some profit. Hopefully, we’ve managed to clear some of your doubts and questions regarding a hard money loan through this article.

You can now consider a hard money loan to fund your next real estate deal. Instead of being scared of the higher interest rates, look at the countless benefits of a hard money loan.

Did a hard money loan help you get through a tight spot while investing in real estate? Share your story in the comments section below:

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