Real estate investors are sometimes in need of some quick funding to develop or renovate lucrative properties. While it is possible to find numerous lending institutions out there, finding one that can offer the kind of credit needed might be quite difficult. It gets even harder if your credit score is imperfect. Fortunately, you can turn to hard money lenders to obtain a loan. Approvals also take equally shorter periods.
Hard money loans are a type of secured loans. They mostly target real estate investors and are short-term loans. They are provided by private money lenders. If you, a real estate investor, find yourself in a situation where you want to buy a piece of property but are limited by money, consider taking hard money loans. These loans are offered by individual investors or small groups of investors. For a hard money loan to be processed, it takes about 5 to 10 days. This is quite a short period compared to that of the traditional lenders, which takes about 4 to 8 weeks.
This means that you only have to go through a couple of hurdles and you will be good to undertake your project. What’s more, hard money lenders are not put off by bad credit; something traditional lenders would never overlook. However, a hard money lender still has to see some proof of income in order to ensure that you are capable of repaying the full loan amount plus the interest charged.
You can use the money you acquire from a hard money lender to buy or renovate property such as land, commercial property, industrial property, multi-family residential homes, or single family homes. Before you get a hard money loan, the lender has to ascertain that you have enough equity in the property being used as collateral for the loan.
Overall, private money lenders are mainly bothered by your ability to pay them back. When assessing the deal, they look at the loan to value ratio (LTV). If your property has a low LTV, your chances of qualifying for the loan are higher. In addition to a low LTV, if you have a good history with the hard money lender, you will have higher chances of qualifying for a higher loan amount.
Pros of Hard Money Loans
1. Quick approval process
An upside to hard money loans is the quick approval process and funding. You can get the loan approved the same day you make your application and receive the funds in a couple of days. For hard money lenders to give you the loan, they only need to verify the following:
• Your history in fix and flip properties
• Your equity
• The value of your property
• Your cash reserves
2. Funding is offered even for property up for foreclosure
Hard money loans are ideal because they can finance projects that a bank or other lending institutions wouldn’t consider financing. Traditional lenders are concerned with getting their money back and avoid high risk investments. However, a hard money lender will give you the loan amount you need to even fix a property up for foreclosure.
Unlike traditional lenders, hard money lenders have more flexible policies. Being that hard money loans are offered by private individuals or groups, they can adjust the terms to suit the borrower’s situation and needs. These loans do not have a standardized lending process and the loan amount you get is based on the value of your property.
Cons of Hard Money Loans
1. They charge high interest rates
Being short-term loans, hard money lenders charge interest rates that are significantly higher than market rates. The rate is somewhat influenced by the fact these loans have a higher risk. The interest may range from 7 to 20 percent.
2. Short repayment period
Hard money lenders give you a short repayment period of 1 to 3 years. This means that you have to flip your property in the shortest time possible.
3. You are required to pay a lenders fee
Hard money loans also comprise of a lenders fee that ranges from 1.5 to 10 percent of your loan amount.