Put simply, a hard money loan is a form of loan financing option that real estate investors use when traditional mortgages might not be an option. Hard money lenders see the properties as “hard” asset collaterals. Of course, there are a lot of complexities so learn more about hard money loans in the guide that follows. Also, do you know many people count more on payday loans these days.
The Issue with Traditional Loan Options
The first thing you should know about a hard money loan is that it is asset-based. Of course, the income and credit history of a traditional loan borrower will go a long way in determining whether they get the loan.
Lenders want people who have good re-payment histories because this will show whether the borrowers will be able to pay back their loans. Even with a good income and a great credit history, there’s still a chance you might not get a traditional loan approved.
The Solution of Hard Money Loans
With hard money loans, the approach is a bit different. The lenders give their funds based on the collateral that the borrowers provide. So, there is less emphasis being placed on credit history. Not everyone can get a hard money loan though.
One of the major real estate trends right now is flipping houses. This is when people buy, renovate, and re-sell houses. If you’re a beginner home flipper and you need capital, then you can apply for a hard money loan. Essentially, the property is yours for some time, and you can make the necessary repairs and then sell it again.
What About the Challenges?
Of course, hard money loans are just a single financing option. Just as it is with every financing option, hard money loans aren’t perfect. While they operate by a simple mechanism, other high returns and short turnaround rates mean that they can be very expensive.
So, if things are going to work out, it is essential that everything works according to plan. Tiny lapses or changes in the plan, if not adequately accounted for, could easily cause everything to go downhill.
Fast Facts About Hard Money Loans
Hard money loans come with both higher rates and shorter terms than bank loans. You’ll find that the terms on hard money loans generally vary depending on the lender. However, the general rule of thumb is that they come with generally shorter terms than the traditional loan you get on bank mortgages and other conventional loans. Apart from that, their periods of maturity usually vary from one to three calendar years.
- A vast majority of lenders believe that rehabbers will be able to finish up with renovations and just re-sell their properties before the loans get due, then they can pay the loans back with the proceeds of the sale. Usually, hard money loans are structured with the idea that borrowers make monthly interest payments while renovations are going on, and the principal becomes due when the sale of the home has been made. However, since their terms are shorter, hard money loans usually have higher rates of interest when compared to traditional mortgages. You can generally find interest ranging from 8 to 15 percent.
- Compared to traditional loan financing, you’ll find that hard money loans provide much faster access to capital. You’ll also see that the approval process on the loans much quickly, as some lenders even provide loan approvals within 24 hours. With the fast turnaround on loans, fix-and-flip investors can get a significant advantage when vying for desirable listings and properties.
- Another benefit of the hard money loan is that the lenders usually focus on the property’s value, and not how much the borrower has. This means that a rehabber who has the right skills can still qualify for a hard money loan, even though he or she might have a past foreclosure or an imperfect credit score.
- Also, with hard money loans, you will be able to get additional versatility. Hard money loans are made on various types of properties, from single condos to multi-family dwellings and even commercial properties. Since they cover more properties, they increase the possibilities of profit for fix-and-flip investors.
- Again, the specific criteria that will need to be met to qualify for hard money loan will usually vary from lender to lender. These criteria cover aspects such as financial history, debt-to-income ratios, and applicable credit scores. As a rehabber, you can boost your chances of securing a hard money loan by showing a breakdown of the expected renovation costs of the property. However, when a rehabber applies for a hard money loan, the necessary paperwork that should be provided includes a property appraisal, tax returns, a pretty appraisal, and a bank statement for the business run by the rehabber.
- Usually, hard money lenders prefer it if the borrowers own a significant financial stake in the project being undertaken. In some cases, lenders might even require that the borrowers commit to as much as 25 to 30 percent of the project’s capital. This way, they can rest assured that the borrowers will be more passionate about the project.
Fix-and-flip projects are susceptible to cost overruns, so it is crucial for a rehabber to add some contingency funds in the budget. For the best outcomes, you can set out about 10 to 15 percent of the entire budget to cover any unexpected repairs that need to be made.