If you are dipping your toe in the real estate investment market, you may have heard of hard money loans. It is a topic that is widely discussed within the investment sector, and it is not always understood. Hard money lenders, commonly referred to as HLMs, are usually either private investors or small investment firms or groups who lend money based on the property type you are buying; credit scores are not a considered factor to this type of lending, investing and borrowing. The property itself is the only protection against default by the borrower. Here are some of the common pros and cons of hard money loans.
Developers and house flippers frequently utilize hard money loans to fund deals because they can often borrow the full amount of the purchase price of the home or property. If you are able to purchase a property and flip it quickly for a huge profit, a hard money loan may be a desirable option. Some real estate investors will use hard money to acquire the property, then they do some major renovations to increase the home’s value. Many of these investors will then acquire a loan from a traditional bank, based on the home’s increased value, and then pay back the hard loan with the bank loan.
Hard money loans are also a feasible option for those with poor credit or anyone needing to get into a home quickly, and you do not have to jump through excessive hoops or cut through a lot of red tape to get the funds you need. In many cases, you can acquire a hard money loan in a matter of days; it can take a month or longer to acquire funds with some bank loans. Once you pay the origination fees, you can easily acquire a hard money loan without an property appraisal in many cases.
Another advantage to a hard money loan is that you typically do not have to deal with the banks, an underwriting team, processors or loan committees. Since most hard money lenders are individuals or very small groups, the process of acquiring a loan is very fast and straightforward. In some cases, you will need to have additional assets to back up your loan.
Hard money loans are very expensive. The interest rates are astronomical, and many rates and fees are even higher than those of the subprime lending market. You can expect to pay at least double the national average, in terms of costs and fees, for a high money loan mortgage when you add it all up.
There are often a lot of hidden and shifted fees when it comes to a hard money loan. Lenders have to include additional clauses and add on more up-front fees to protect themselves from default with these risky loans. Due to the high interest rates and large number of up-front and recurring fees, hard money loans are best suited for professional house flippers and property rehab teams. If you have bad credit and need a hard money loan to get into a home quickly, these loans can be good for the initial purchase; you will want to refinance and repair your credit to acquire a traditional bank loan based on the property value to pay off the hard money loan as soon as possible.
Hard money loans are a fast way to secure capital for properties or homes quickly and without hassle or frustration. If you are new to flipping houses, these loans can be a great source of quick capital to secure the property and materials needed to complete the restoration or renovation. From an investor’s standpoint, hard money loans are a way to expand your investment portfolio because they offer a significant rate of return. They are high on the risk investment scale, but if you work with established house flippers or professional contractors with assets as back up, you greatly reduce the risk of having defaulted loans. Individual buyers with poor credit may only want to choose hard money loans as a last resort due to the high interest rates, fees and costs associated with these types of loans.