A Complete Guide to Hard Money Loans
Hard money loans are often used in real estate investing. But what exactly is a hard money loan and how is it of benefit to you?
Are you a real estate investor looking for a different way to obtain funds to purchase real estate? Have you heard about hard money loans but have no idea where to start looking or what they are? If any of that sounds like you, you came to the right article.
Hard money loans are a great alternate way to obtain funding to purchase real estate when conventional loans aren’t getting you what you need. Continue reading below to learn more about the ins and outs of obtaining a hard money loan and where you can go to qualify for one today.
What Are Hard Money Loans?
Hard money loans are loans that are typically backed by “hard assets” such as real estate. These types of loans are great for those who flip homes or who invest in real estate. Hard money loans are only available through individual investors or private lenders, and they are suitable for short-term financing.
How Do They Work?
Hard money loans are easier and quicker to obtain because they are asset-based. The lender approves the loan based on the property’s value, not the borrower’s creditworthiness. Because the loan is based on the property’s value, the lender can release the loan within a matter of days instead of months or weeks.
Although hard money loans are easier to obtain, they are more expensive. Because the lender is taking on a higher risk by assessing the property instead of the borrower’s credit, the loan will typically come with higher interest rates.
How to Get a Hard Money Loan
It is essential to do your research to find the perfect private lender for your business needs. Because these loans aren’t traditional, you may not be able to find them through an average brick-and-mortar bank. If you are having a hard time finding a hard money lender, it may be ideal to contact a real estate agent familiar with different types of real estate lending.
When you find a lender who processes hard money loans, building a good relationship with that lender is also essential. When you build that relationship, you can potentially receive additional hard money loans for other real estate investing opportunities.
If it is your first time obtaining a hard money loan, the lender will want to review your investment history and verify the asset’s value. If you receive a loan approval, you will have to put down between 30% to 40% of the loan to secure it.
Hard Money Terms and Requirements
Hard money loans typically have one to three-year terms, and they generally have three requirements: experience in real estate, financial strengths, and your down payment.
Real Estate Experience
As stated earlier, lenders are going to want to look at your experience with investments. If you aren’t a veteran in real estate investments and looking to purchase your first fixer-upper, you may have a more challenging time obtaining a loan. Don’t let that discourage you; some lenders are willing to review the property and ask you about your project’s details so they can still consider extending you the loan.
Because hard money loans don’t necessarily scrutinize the borrower’s personal credit, lenders will want to know more about your overall financial health status.
These lenders will take a look to see if you have the necessary cash reserves to make the required monthly loan payments or holding costs. If you have high cash reserves, you are more likely to receive approval for the loan.
If you don’t have high cash reserves, there is no need to fret; the lender may still offer you the loan. The lender may provide you with a higher loan amount to cover loan payments and taxes.
When you look to receive approval for a hard money loan, it is essential to remember that your down payment may range between 25% to 40%. Residential properties will have a down payment range between 25% to 30%, and commercial properties will range between 30%-40%.
If you can, it may be best for you to put down higher than the recommended or requested down payment. Lenders will more likely approve you if you have a higher deposit because it reduces their risk in the investment.
Traditional Vs. Hard Money Loans
Traditional loans and hard money loans have various pros and cons, and they differ in several different ways. Hard money loans have short repayment periods, which can be just a few years.
Traditional loans, also known as conventional loans, commonly have 30 or 15-year terms. Conventional loans are evaluated on the borrower’s creditworthiness, whereas hard money loans are assessed based on the property’s value being purchased.
Another difference between a hard money loan and a traditional loan is how they are regulated. Conventional loans are regulated to protect borrowers from getting a loan they won’t be able to afford.
It also protects borrowers from any predatory lending that is unfair or deceptive. Hard money loans aren’t regulated, so it is crucial to find a fair lender who will go over all the terms and conditions of the loan.
How Are These Loans Used?
Hard money loans are used for many excellent reasons, such as purchasing investment properties, purchasing commercial properties, and flipping homes. Each of these investments can yield excellent results if done correctly.
If you want to invest in a rental property but do not qualify for the traditional loans needed to purchase a rental property, you may want to look into a hard money loan. Hard money loans are fantastic for rental properties if you cannot approve a traditional loan due to your credit.
It is also ideal if you aren’t approved for the amount you need to purchase the property. A hard money loan may give you the flexibility to obtain a higher loan amount to buy what you need.
If you are a business owner seeking to purchase commercial real estate, you may also want to obtain a hard money loan. Getting commercial real estate through conventional means may not be ideal for your business due to possible commercial loan limits.
You may be interested in purchasing properties for your business that are unique or that don’t qualify for commercial loans, and that is where a hard money loan can help.
Hard Money Rates
Hard money rates are historically higher than traditional loans. Hard money loans typically have rates between 8%-15%, whereas a conventional 30-year fixed loan was about 3.62%.
Hard money loans have preferred loan-to-value or LTV ratios. If your lender is only willing to finance between 70% to 80% of the loan, you will have to bring a higher down payment.
Are They Worth It?
If you are okay with a short repayment time frame and the possibility of a higher down payment, then yes, a hard money loan is worth it. Hard money loans are especially worth it if you are in the business of flipping houses.
In the short amount of time that you have the loan, you may be able to improve the home, which increases the property’s value. Once you have renovations complete, you can sell the house as soon as possible to recoup the money borrowed.
Another pro of having a hard money loan is if you default on the loan, the lender will resell the property themselves. Obtaining a hard money loan is absolutely worth it if you are looking to get a loan without an extensive loan process.
Although hard money loans cost more than government lending programs or obtaining loans through banks, the increased cost is a tradeoff for access to high capital. Hard money loans are suitable for short-term financing and situations with quick turnarounds.
They are also fantastic for borrowers with poor credit but have a significant amount of equity in their properties. If approved, you may also be able to use a single loan over multiple properties. When you use a single loan over multiple, lenders consider that cross-collateralizing.
Obtain a Hard Money Loan Today
Although there are several pros and cons to obtaining hard money loans, it depends entirely on you and your business needs. Partnering with a reputable hard money lender is crucial for your business and your finances.
Hard money loans have shorter repayment times, and they require a higher downpayment which may put a dent in your finances, so it is best to partner with a lender who will put your mind at ease. If you are looking for “real estate borrowing,” contact us now to learn more about your options.