Are you looking at getting hard money loans for your investment property, but you aren’t sure if it’s the right decision?
If so, we are here to give you an in-depth look at hard money loans. We will tell you what properties these loans are perfect for and what you’ll need to qualify. Our goal is to make it easy to see if a hard money loan is perfect for you.
To learn more about hard money loans, keep reading below.
What Is a Hard Money Loan?
Hard money loans are loans are usually secured by hard assets. This hard asset can be something such as a car or property that will yield a profit to help repay the hard money loan fast.
In contrast, when you take out a mortgage for a home this loan usually secured by the value of the house that you’re buying. It’s also secured by the borrower’s ability to repay the loan in the term they have selected.
Hard money loans are a form of private loans. This means that the money for this loan is given by private lenders. This is in contrast to government loans where the money is provided by government-regulated finical institutions.
When looking to get a hard money loan, you can seek out a hard money lender. Hard money lenders do exactly what banks do: loan out money.
Who Uses Hard Money Loans?
Hard money loans are used by real estate investors that will need short-term funding. This short-term funding is usually for an investment deal or idea.
Since good deals get picked up fast and cash makes the world go round, if you don’t have access to enough funds to make your idea tangible then you can kiss it goodbye. This is especially true when you need to buy property for your investment idea.
If you don’t have access to enough cash to fully fund the investment, then your offer on the property won’t be competitive. All in all, there are two uses for short-term hard money loans.
The first purpose is to help finance properties you intend to fix and flip. Here the goal is to flip it quickly so you can get your money back and pay off the loan in record time.
The second reason to get a hard money loan is to help bridge the gap between longer-term financing and an investment property purchase. Those who have buy-and-hold rental properties usually use hard money loans to have access to funds to help renovate the property. They might also use these funds to pay off any debt on it.
Hard money lending is ideal for house flippers that can’t borrow money from a bank. The two main reasons this happens is due to low credit scores or the investment not passing the strict guidelines of other lenders.
When it comes to hard money loans and interest rates, usually the interest on these loans is higher. These high rates help to compensate the lenders due to the increased risk of the deal.
How Are Hard Money Loans Different Than Traditional Loans?
There are several differences when it comes to hard money loans in comparison to traditional loans. The first difference is that they come in loan terms from 6 to 18 months. Usually, traditional loans are 30 years.
Hard money loans usually have an interest rate that’s anywhere from 4 to 10 percent higher than traditional bank loans. Also, hard money loans are great for short-term investors where traditional loans are for owner-occupied properties.
Lastly, hard money loans are secured by using collateral to secure the loan. By comparison, traditional loans are backed by the borrower’s personal credit and the property itself.
What Do Hard Money Loans Pay For?
Sometimes you will hear hard money loans referred to as “rehab” loans. This means that the loan includes the cost of renovation.
Lenders will sometimes require that rehab costs estimates are given by the contractor who will work on the renovation job. Usually, hard money lenders will only approve the expenses that will directly increase the value of the investment property.
What Are Typical Hard Money Loan Terms?
The term of a hard money loan will vary due to the lender you use. Typically this change is due to the geographic region in which you’re buying an investment property.
You can usually expect an interest rate of 7 to 12 percent and a loan origination fee anywhere from 1 to 3 percent. To get your hard money loan, you won’t need perfect credit or to provide much personal information since the loan is secure due to the assets you put on it.
A hard money lender will want you to have some experience in this area though. Usually, they will want you to have at least 10 percent of your own money to put down towards the investment property. This will help the lender to see that their interests are protected.
After all, no one wants to lose the money they invest.
The loan terms between hard money lenders are competitive. If you have a credit score of 620 or more, you can get a loan that will cover up to 90 percent of the investment property purchase and a 7 to 10 percent interest fee.
If your score hovers around 600 then you can get a loan that will cover up to 75 percent of the investment property. This loan will also have an interest rate anywhere from 7 to 10 percent.
How Are Hard Money Loans Distributed?
The hard money loan funds are dispersed in draws or predetermined disbursements. These draws are usually based upon what the contractor needs.
The first distribution will cover the property acquisition cost. Subsequent draws will then follow to meet the needs and costs of the renovation schedule.
How Do Lenders Approve People for Hard Money Loans?
When you apply for a mortgage through a bank, some underwriters make sure you can afford the monthly payments. Someone will need to appraise the property to make sure the mortgage doesn’t exceed the overall value of the property. Traditional lenders will issue mortgages for owner-occupied properties and not investment properties.
When it comes to a hard money loan, the lender will is usually more focused on the deal. They will be asking questions such as if the finances make sense, if the home is being bought at a discount price, and was a budget accurately made for the renovations needed.
After looking at these aspects, you can usually get approved for a hard money loan in 7 to 14 days.
What Are the Upsides to Hard Money Loans?
There are a few upsides when it comes to hard money loans. Usually, borrowers and lenders can close fast. This becomes very important when you’re dealing with a competitive marketplace.
Another upside is that the loans are backed by property and assets. This means you won’t be personally responsible for the repayment of the loan.
Credit scores not being considered is another positive of hard money loans. Also, these loans offer a lower loan-to-value ratio so you won’t need to put 20 percent down like you would with traditional loans.
Lastly, these loans are very useful as bridge loans. These bridge loans will help to fund your investments while helping to secure long-term financing.
What Are the Cons of Hard Money Loans?
Just like anything that has upsides, some downsides come with it. When it comes to hard money loans, a downside is that they have higher interest rates than other forms of financing.
Another negative to these loans is that there is a 1 to 3 percent fee for loan origination. Besides, you must finish the rehab in the given time window. This is ideal for properties that have no issues that pop up, but let’s be honest — these are few and far between.
In addition, the lender holding the property deed as collateral is a big downside. This means if you can’t finish the rehab and pay the loan back, you’ll walk away empty-handed.
Lastly, the lender will require that you obtain builders’ risk insurance. This is often more expensive than the property and is usually something that is required when you take mortgages out on a home.
Now You Know All About Hard Money Loans
After reading this thorough guide to hard money loans, ow you know what a hard money loan is and what types of properties they are useful for.
We have also given you a look at the upsides and downsides of these loan types so you can select the ones that are best for you.
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