You might need hard money real estate loans more than you realize. Keep reading and learn more about hard money loans here.

If you are a real estate investor or looking to become one, you may already have heard about hard money loans. These loans are great financial tools you can use to fund your real estate projects.

Not only can you use this money to fund your real estate projects, but you can also receive the money faster than any conventional lending product. If you want to learn more about hard money real estate loans, then you came to the right place. This brief guide will walk you through a hard money loan and who you can reach out to for additional information.

What Are Hard Money Real Estate Loans?

Hard money loans, also known as bridge loans, are loans commonly used by real estate investors to purchase properties to sell. These investors get these short-term loans to buy homes or other types of properties to fix and flip.

Investor groups of private lenders typically fund these real estate loans, and they use real property or equity to back the loan. Some hard money loans are interest-only. This means you only pay the interest on the loan until the end of the loan term.

Once you reach the end, you must pay off the remaining balance at the end of the term. This large amount at the end is typically called a balloon payment.

Banks usually do not offer these types of loans due to the risks associated with these loans. House loans provided by traditional banks typically have stringent requirements borrowers must meet before releasing any type of loan.

Hard Money Loans vs. Soft Money Loans

Soft money loans and hard money loans are great ways for borrowers to access the capital they need to fund their real estate projects. The main difference between the two is the type of backings they each have.

Hard Money Collateral

Hard money loans are typically secured by real property assets such as a house or a different type of property. This means that if your default on your loan, the lender will take possession of the house and sell it to recoup their loss.

Hard money lenders are more concerned with the property’s value, not the borrower’s personal credit profile. Some hard money lenders check into their client’s credit background, especially if the applicant is newer to getting a hard money loan.

Soft Money Collateral

The borrower’s credit almost always backs soft money loans. Soft money loans can be credit cards, car loans, or house loans authorized by a bank. This type of loan obligates you to repay the total sum of the money you borrowed.

They focus more on your repayment ability and creditworthiness to qualify you for a loan. Keep in mind that there is no collateral backing the loan with a soft money loan. If you default on the loan, you will need to repay the amount borrowed.

Who Should Use a Hard Money Loan?

Borrowers usually opt for hard money real estate loans because they need money quickly or their credit is not strong enough for a conventional loan. Traditional loans can take months to review and process before you receive the loan’s proceeds.

Hard money loans can be approved within hours, and you can have the money within days or weeks.

These property loans have short repayment times. Some lenders give you up to five years to repay the loan, whereas other lenders may only give you between 6 months to 18 months. Because of the shorter repayment time, these hard money loans are best for short-term projects such as fix and flip projects.

Some investors use these funds to renovate their properties. After they complete their renovations, they then refinance that loan to a conventional loan with lower interest rates.

Hard Money Rates

As you may have noticed by now, hard money loans come with higher interest rates than other real estate loans. The average rate for a hard money loan ranges between 7% and 20%. The interest rate you will have for your hard money loan will depend on the lender you choose and the amount of money you request to borrow.

Predatory Lending Rates

It is very important to know that the government does not regulate hard money loans. Conventional loans and federally backed loans such as VA or FHA loans have strict requirements they must adhere to.

For example, they regulate the interest rate that an applicant must pay. Hard money loans have very high interest rates that exceed what a government-backed home would have.

Because the government does not regulate hard money loans, lenders can set the rate at whatever amount they want. Make sure that you review all your contracts before you sign to ensure that you are not falling victim to a predatory loan. Predatory lending is meant to keep borrowers from paying their loan on time or at all so that the lender can recoup more money.

Hard Money Loan Down Payment

The down payment for a hard money loan is typically higher than that of a soft money loan. Most hard money lenders require their borrowers to put down at least 20% of the house’s purchase price.

The amount that you will need to put down depends on your lender and your loan to value ratio. There are instances where clients have to put down 30% of the home’s purchase price.

Hard Money Loan Advantages

There are many significant advantages of getting a hard money loan, such as the quick approval time.

Quick Approval

As mentioned earlier, conventional loans take months to process and release your funds. Hard money loans don’t have an extensive underwriting process, allowing borrowers to access capital within days.

This quick turnaround time is very beneficial to real estate investors. Sometimes speed can make a huge difference when it comes to closing a deal. Real estate investors will reach out to a hard money lender when bidding on a property at an auction.

Credit History Considerations

You don’t need to have a strong credit profile to get a hard money loan. Traditional mortgage lenders focus more on the borrower’s credit history and income, whereas hard money lenders focus more on the property’s value. Hard money lenders need to know the after-repair value of your property after the planned repairs and renovations are complete.

Flexible Loan Terms

If you have property or assets to use as collateral for your loan, it does not matter how your credit profile looks. Hard money lenders are very flexible when negotiating the terms of your loan because they do not adhere to the same regulations as a conventional loan.

Hard Money Loan Disadvantages

Although there are many different advantages to obtaining a hard money loan, there are a few disadvantages you should be aware of. For example, the interest rates for hard money loans are much higher than traditional mortgage loan rates.

Higher Cost

The article mentions that hard money loans have higher interest rates and higher down payment requirements. Although this may seem like a disadvantage, there is a reason for the higher costs.

Hard money loans do not have the same regulations or stringent underwriting process as conventional loans, which means that hard money lenders are a bit more lenient than other real estate lenders. To mitigate their risk, hard money lenders charge more.

Loan to Value Ratios

To qualify for a hard money loan, you will need significant assets or a large down payment. Hard money lenders require a loan to value ratio of around 30% to 70%. Of course, this is much higher than conventional loans.

Fannie Mae guidelines have a loan-to-value ratio between 75% to 95%, meaning that you only put down between 5% to 25% of the home’s purchase price. You do need to remember that although the loan to value ratio is considerably higher than a conventional loan, it is for a good reason.

Your credit does not back hard money loans. Instead, the collateral, which is the property, secures the debt, not your creditworthiness.

Apply for a Hard Money Loan Today

Hard money loans are fantastic financial tools that you can use for various different reasons. You can use the funds to renovate an already existing property or use the money to fund a new project.

Whether you need the money to start your real estate investment journey or update an existing property, you will need to make sure you partner with a reputable lender. Orchard funding has the experience and expertise to provide you with the loan you need for your real estate investment portfolio.

If you are ready to start the process to obtain your hard money real estate loans, contact us now! Our team is prepared to answer any questions or concerns about the application process.