In the United States, the ever-increasing prices of homes mean that the vast majority of home buyers will be forced to take out a mortgage in order to finance the acquisition of a house. Mortgages have been around for hundreds of years. In that time, major corporate banks have boiled the underwriting of home mortgages down to a science.
This is a good thing for borrowers that are able to qualify. The strict lending standards banks impose on their mortgage departments ensure a minimum of defaults, keeping the interest rates and fees low for customers. On the other hand, the stringent due diligence that nearly all mortgage lenders perform mean that a large number of potential home buyers will not be able to qualify for a traditional mortgage.
For many people not qualifying for a mortgage is simply a cue that they need to work on improving their credit, saving more money and possibly generating more income if they are truly interested in someday becoming a homeowner. However, for a few savvy real estate investors, other more sophisticated options may be on the table.
Hard money loans are a powerful investment tool
For smart real estate investors, one of those alternative finance options is a hard money loan. Unlike mortgages, a hard money loan is typically issued by an individual investor or a local group of real estate investors. Because these loans are not issued by large corporations, they are usually almost infinitely flexible, with creative real estate buyers being able to tailor deals precisely to their needs. In this way, hard money loans are more like the way that business purchases are put together. Any aspect is open to negotiation, including forms of payment, possible equity being issued in the assets, collateral requirement and payment terms.
Hard money is fast money
The price that real estate investors pay for hard money is increased interest. The benefit they get in return, besides flexibility, is speed. In some of the nation’s hottest real estate markets, the average time that a home takes to sell is measured in days. In these markets, cash is king. And when it comes to speed, hard money is as good as hard cash.
Sellers are generally not interested in fiddling with mortgage-reliant buyers when cash buyers are available. Mortgages lenders can take up to three months to approve applicants, and these processes frequently result in the application being denied. This is too risky for buyers in markets where having a home tied up in a pending sale for three months could cost them tens of thousands in lost offers.
The hard money borrower with established lending relationships is in as favorable a position as cash buyers. In many cases, hard money lenders are willing to issue loans as fast as the same day to established borrowers. That kind of speed allows hard money borrowers to guarantee closings within short timeframes, staying nimble in kinetic markets and nabbing the best deals as they pop up.
Hard money drawbacks
While hard money loans can have enormous benefits to smart real estate investors, they are not a perfect fit for everyone. One of the drawbacks of hard money loans is that they often have much higher rates of interest. For cost-conscious investors who are trying to minimize out-of-pocket expenses, this usually isn’t a problem as most will flip their properties within a few months.
However, hard money loans are generally not an advisable means to achieve long-term financing on a home. If hard money is used to buy a home that the buyer plans to stay in over the long term, the loan should be refinanced as quickly as possible.
Hard money loans can get deals done
For savvy investors, a hard money loan can make deals like fix and flips happen. On a $100,000, a hard money loan may only carry $5,000 in out-of-pocket costs. The same purchase with a mortgage may require the investor to pony up $30,000 or more.