You have finally found the perfect investment property. But when it’s time to put your money down, the banks aren’t willing to give you a mortgage on it because they think it’s too risky, or there simply isn’t enough time to wait for the bank paperwork to go through. These financial impediments can derail a great investment deal pretty fast!
Hard money loans are a viable alternative to mortgages. And hard money lenders are usually willing to fund property deals that are too risky for institutional lenders. The closings are quick and very little to no regard is given to the borrower’s credit or income. However, all this ease and convenience comes at a high interest rate.
What are hard money loans and why consider them?
Hard money lenders are nothing like banks. It can consist of a single individual, a group of people, or even a company that’s in the business of lending money; it’s as simple as that. Borrowing from them is a lot easier than borrowing from a bank. There is usually a one-time processing fee that is paid up front and a higher-than-usual interest rate.
These nontraditional lenders offer an unconventional financial arrangement confidently because a physical asset backs the loans they offer. So, if you are getting a hard money loan for a real estate investment, chances are that that piece of real estate will work as the collateral for the loan itself. Bank loans, on the other hand, are based on your credit score. However, the exact terms of lending depend on the contract signed between the borrower and the hard money lender.
The fact of the matter is that hard money loans are never a long-term solution to your financing woes. But they can act as a bridge to help you secure your preferred property until the bank loan comes through. Terms usually last from 3 months to 3 years, and your hard money lender will often only charge interest-only payments until the loan amount comes through and the hard money loan can be paid back in full.
The super-high costs and the short durations mean that it also works well as a bridge loan used to acquire a property or pay for renovations before it is sold or refinanced into a conventional mortgage.
Do you need a hard money loan?
Following are a few consequential reasons why you may choose to get a hard money loan as a real estate investor:
1 The process is relatively quick and painless
You’ll be working with an individual lender or a small group of them. This means lesser paperwork and generally less of a headache to get your loan approved. It can take a few days, or a few weeks, but no longer than that.
2 You’ll be able to borrow more if the need be
With a traditional mortgage, you have to put down 5% to 10% of the purchase price. And then you are locked for the duration of the loan for the remaining amount. With hard money loans, on the other hand, you can get 100% of the purchase price and that too without any kind of down payment. As long as you are responsible enough to continue paying the interest and origination fee, you can continue to borrow for other ventures as well.
3 Establish a profitable relationship
Once you establish a working relationship with a hard money lender, they are more likely to work with you in the future. A good track record may also help you secure hard money loans that are a more significant chunk of the purchase price, and your lender can also reduce the fee, interest rates and the amount of time it takes for you to get the money.
Hard money lending is commonly used by real estate investors because they can’t win over traditional lenders on time, or their investment ideas are extraordinarily risky. So, when you need funding to purchase a distressed property, or if you want to fix a home for a quick property flip, hard money loans are a good option.
Other investors, who are into purchasing income properties, can also take advantage of the facilities offered by hard money lending. They can use the loan to stabilize the property until they get returns on it. And once that happens, they can get a bank loan, i.e., a traditional mortgage that has lower interest rates and pays off the higher interest rate hard money loan.
Remember, if you need a hard money loan you can quickly secure it as long as you have enough equity in your property. A poor credit score doesn’t matter in this case.