For entrepreneurs who cannot qualify for traditional commercial financing, hard money loans can be an alternative source of funding. However, it’s important to understand the risks and fees involved in these types of financing programs.
It’s also wise to choose a local hard money lender, who is familiar with the area’s real estate market and trends. This can help ensure a smoother loan process.
1. What is a Hard Money Loan?
A hard money loan is a type of financing that is provided by private lenders rather than traditional banks and financial institutions. These private investors, funds or companies offer non-conforming loans based on the value of an asset, typically real estate, as collateral.
These loans typically have a shorter repayment term than conventional mortgages which can be 15 or 30 years. They also have higher interest rates.
Most hard money lenders will require that the borrower has at least 35% or more equity in the property before they will consider lending. This requirement is because real estate values can go up and down in value over time, so the lender needs to protect itself from a potential loss on the investment.
Borrowers should seek out reputable hard money lenders who have experience in the field. One way to do this is by asking for referrals from trusted real estate agents or mortgage brokers. They can also find lenders by attending real estate investor meetings in their area.
2. How Do Hard Money Lenders Work?
Hard money lenders are independent of banks or Freddie Mac and have their own pool of investors. The lender will review the property, the borrower’s experience in flipping properties and their exit strategy for the property before approving or disapproving a loan. Hard money lenders are typically able to offer quicker funding than traditional mortgages as the property is used to secure the loan.
Hard money loans are a great option for individuals who are looking to buy a property quickly or as an investment. They can help you close a deal in weeks or even days when a traditional bank could take months. They also have no minimum credit requirements, and instead rely solely on the value of the asset that’s securing the loan. Generally, you can borrow up to 75% of the property’s total value. Many real estate professionals and title companies can refer you to hard money lenders in your area. You can also find them by searching online or at real estate investor meetings.
3. What Are the Benefits of Getting a Hard Money Loan?
Hard money loans are great for real estate investors that need to purchase, repair and resell properties fast. They are also good for borrowers who may not qualify for traditional financing. The biggest benefit of hard money loans is that they are secured by an asset rather than the borrower’s credit and finances. This makes the loan easier to approve. Additionally, hard money lenders are often more flexible with terms than traditional lenders.
Depending on how you use the loan, you can also deduct interest payments from your taxes. However, the most important thing to keep in mind is that hard money loans are typically more expensive than traditional mortgages.
While the benefits of a hard money loan are many, it is crucial to understand the cost and terms associated with this type of financing. Be sure to consult with a reputable hard money lender and carefully review all of your options before making a decision.
4. What Are the Disadvantages of Getting a Hard Money Loan?
As with any investment, there are pros and cons to hard money loans. Generally, they have shorter terms and higher interest rates than traditional mortgages. However, hard money lenders may be more flexible with their lending criteria and are able to close loans quickly.
Hard money lenders are usually private investors or companies that specialize in real estate investments. They don’t have the same regulatory restrictions as banks and are able to evaluate a property based on its value. This means that they are less concerned about the borrower’s credit history and debt-to-income ratio and more focused on the potential upside of the property.
One downside of hard money loans is that they can be costly if you are not careful. You should always shop around and work with multiple lenders to make sure that you are getting the best deal. Also, remember that hard money loans typically will show up on your credit report, which can impact your future borrowing abilities.