Navigating the world of financing in the real estate Market can be a daunting task, especially for real estate investors. But thanks to hard money lenders, you can get credit for your next property or project without having to deal with a bank.
With flexible terms and fast funding times, hard money loan programs have a lot to offer.
This article will explain more about how hard money lenders work – including their benefits and disadvantages. Ultimately, these loans can provide essential capital when traditional financing options are unavailable, becoming a reliable source of creative financing.
Hard Money Lenders 101
What is a hard money loan?
A hard money loan is a short-term loan provided by a private lender. It is non-conforming, meaning it does not meet the mortgage guidelines set forth by Fannie Mae and Freddie Mac. Let’s first look at the process of traditional loans and then compare it to hard money loans.
For a traditional mortgage, you must go to a bank and show proof of income, savings, and a review of your credit score to qualify for the loan. Based on your credit history and current situation real estate market, you can pay origination points to help reduce the interest rate. The approval or refusal of the loan occurs within 30 days.
The loan you get may be a fixed rate loan (the most popular being 15 or 30 years). You can also choose a variable rate loan, which would see the interest rate change at specific intervals, but the loan term would be 30 years.
A hard money loan is subject to a less strict approval process. Hard money lenders usually start with a credit or financing check, but this is only a small part of the process. This information is compiled with the rest of your application, but is one of several elements considered for approval. In other words, you can still qualify for a private loan even with poor credit.
Some lenders require proof of successful flip loans. You will obviously only have this information if this is not your first flip loan.
Finally, you may need to provide information about the property or your plans. This is because hard money lenders offer loans based largely on the resale value of the property rather than the borrower’s ability to repay the hard money loan.
You may be lucky enough to be approved in just a few minutes, but it could take several days.
After you choose a loan offer and agree to the terms, your lender will provide you with a proof of funds letter so you can immediately begin your real estate investment, purchase, construction or renovation.
The biggest advantage of a hard money loan is that you can get the funds quickly, usually within a few days. Compare that to a traditional mortgage that can take a month or more to get approved.
Of course, there are downsides, the main one being the interest rate. Because there is more risk for the hard money lender, they charge a much higher interest rate than the going rate for a 15 or 30 year mortgage.
How do hard money loans work?
Unlike traditional loan approval, a lender’s approval depends less on the borrower’s ability to repay and more on the value of the property.
For this reason, loan amounts are based on the project rather than what you offer as collateral.
The loan term is typically one year or less and it is an interest-only loan with a large balloon payment at the end.
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Where to find a hard money lender
Investors looking for a short-term loan from private lenders can contact real estate agents, title agents, closing attorneys and other investors for leads.
Additionally, an online search will also return results for your area.
The last thing to consider is whether to use a local or national lender. Some investors prefer local hard money loans because the lender understands the area better and is more likely to approve your application.
However, others prefer national lenders, which have greater resources. Ultimately, you need to decide which route to take with your investment property, as both have advantages and disadvantages. Contact one of their Customer Service Representatives to get more information.
Why Real Estate Investors Use Hard Money Loans
So why would anyone choose to take out a hard money loan instead of a conventional loan?
There are several reasons, including needing money quickly to purchase property.
Unlike those who invest in Real Estate Investment Trusts (REITs), others want to own property. As an investor, you will not hold onto your properties for 20 years or more. So you need a loan option that is flexible enough to accommodate short-term commitments.
Because these loans are quick to obtain and have a short repayment period, they function as short-term bridging loans until the property eventually falls into the hands of the long-term owner or you obtain traditional financing .
Possess Investment property It’s a great way to make money if you make smart choices and the market cooperates. Here are some ways investors can use a hard money loan to improve their portfolio.
Return a property
Hard money loans are perfect for real estate investors because the goal is to sell the property within a few months. Therefore, they do not need a low interest rate since they only need the short-term money to purchase the property or cover the rehabilitation costs.
Even though the rate of money they borrow is higher, they factor this into their plans, allowing them to make a profit.
Buying an investment property
Since approval only takes a few days, if an investor zeroes in on one property, they can offer and close in days, not months. This agility gives them an advantage over other investors.
Once they own the property, they can apply for a traditional mortgage with a better interest rate if they plan to keep it long term.
Building a real estate empire
It’s difficult to qualify for additional rental property loans from a traditional lender because you want to borrow more than the bank is comfortable with.
A private lender could be a good alternative in the short term.
Buy commercial real estate
A business bridge loan is a way to get cash quickly before a more traditional loan is made. When you need a large amount of money quickly, such as to purchase a commercial property, a hard money loan can fill the gap.
Hard money lenders will even offer to finance real estate development. Although this is not the most common use for a hard money loan, it is a way for people with limited credit history to build a home or begin investing in property. real estate.
Another use could be to cover the costs of upgrading a rental property you are considering selling. In this case, the property has become dated over time and needs updating to sell for the best price.
The added benefit here is that the value of the repairs could make the home more valuable, meaning you sell it for more.
Advantages and disadvantages of a private lender
Of course, there are pros and cons to working with hard money lenders. So whether you’re borrowing for a rental property or another real estate investment, think carefully about the details of a private money loan before you take the plunge.
Fewer rules and regulations, i.e. no red tape May provide a new business opportunity Usually does not examine the borrower’s credit history Fast financing
Higher interest rates may require a larger down payment. Less time to repay the loan. Sometimes this requires proof of successful home resale.
Alternatives to Hard Money Loans
If working with a hard money lender isn’t a step you’re willing to take and a traditional lender isn’t an option, you may want to consider a few middle-ground options.
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In this case, a private lender is a friend, family member, or other investor looking to make a profit on their investment. You will need to enter into a legal agreement outlining the terms and conditions of the loan agreement and the repayment period.
Although rare, this is a great alternative to consider.
Home Equity Line of Credit
A HELOC can give you the money you need to improve your home or use it as a down payment on a rental property. There are requirements for these loans, but they are generally less strict than home mortgage loans.
Additionally, investors who own multiple investment properties could take out a home equity loan for each property and pool the equity to use as a down payment or rehab a property.
Fannie Mae Homestyle® Loan
Still backed by the government, these loans are intended for home renovations and not new construction.
The loan allows the borrower to roll the rehabilitation costs into the mortgage, so they have a monthly payment each month.
If you’re struggling with bad credit or are an investor looking to build a rental portfolio, using hard money lenders is a smart option.
Even though hard money loans carry high interest rates, these loans can help you access easy money.
You’ll only use them for certain purchases you make, but you never know when you might come across the perfect property to buy. And if it’s a good deal, it’s only a matter of time before another investor discovers it.
You can put yourself in control of the property by closing quickly.
This article was originally published on The wealth of geeks.
Jon is the founder of MoneySmartGuides, which helps people get out of debt and start building wealth to achieve their dreams. He has over 15 years of experience in the financial services industry and 20 years of stock market investing. He holds an undergraduate and graduate degree in finance, holds a FINRA Series 65 license, and has a certificate in financial planning. He is also the founder of Unfinished successa personal development site whose goal is to help you become the best you.