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Feb 23 2018
  • By wpengine

Are all hard money loans backed by real estate?

Traditional or institutional financial companies offer a wide range of loan programs, but there are times when you cannot qualify for these loan programs for various reasons. When you cannot afford to pay cash for your plans and when you cannot get a loan from a bank or a credit union, you may believe that you have no other option except to walk away from your plans. This could mean that you leave an incredibly lucrative opportunity on the table, which is not ideal. When other financing options are not available, consider the alternative of getting a hard money loan. One of the more common questions that people have about hard money loans is if they are only available for real estate. 

A hard money loan is a type of secured financing that is collateralized only be a real asset. Typically, a hard money loan has a very short term, and this may range from a few months to one to two years in some cases. If you are thinking about applying for a hard money loan for upcoming real estate plans after learning that a traditional form of financing is not an option, you need to understand more about the type of collateral that may be used and how the loan funds can be used.

What Type of Real Estate Is Considered?
Traditional loans offered by financial institutions typically have stringent underwriting guidelines. Some of these loan programs may be specifically designed for owner-occupied homes or investor properties, for example. Hard money loans are unique because they are not backed by the government, and they do not need to fit into a pre-determined box of guidelines. These are loans that are funded by private funding companies or even by individual investors with deep pockets. With a hard money loan, the investors will analyze all of the strengths and weaknesses of a loan request individually to determine if the loan makes sense overall. After all, many deals can be very lucrative and make excellent sense even if they do not conform to traditional bank underwriting guidelines. 

Because hard money lenders can be more creative in their approach to reviewing and approving loan requests than a bank, they typically are more lenient on the property type. The collateral does need to be real estate. However, it could be raw land that you intend to develop, a single-family home that you plan to flip or even a commercial property that is currently underperforming. Some hard money lenders only offer loans on specific property types, such as residential properties or commercial multi-family properties. Others will consider all scenarios and property types. Most, however, have a maximum loan amount that the can offer.

What Type of Scenarios Are Considered?
One of the things that you may have noticed with traditional bank loans is that only specific scenarios are considered. For example, you must plan to live in a residential home that you are buying to qualify, or an apartment building that you are buying as an investment must have a history of 90 percent occupancy for at least the last six to 12 months. Most residential and commercial loan programs from financial institutions also are for developed properties in good condition. If the property needs to be rehabbed or if you need a land and development loan, your options may be more limited. 

Each hard money lender is different, but most will consider a wide range of scenarios. Hard money loans are usually used to reposition a property so that it can qualify for a traditional loan within a short period of time. For example, a hard money loan may be used by a flipper to update a home that is currently in very poor condition. It may also be used to buy a run-down apartment complex, renovate it and lease it up. When you request a hard money loan, you need to have a very detailed and strategic plan for the real estate that you intend to buy. Your plan needs to include a list of expenses to turn it around as well as a timeline for leasing it, selling it or refinancing it with a traditional loan. 

Because a hard money loans is a secured loan that is collateralized by real property, you must use the funds to buy or refinance real estate. However, at least some of the funds could also be used to develop or rehab a property as well as to fund marketing plans to lease up a vacant property. Essentially, the loan funds will be secured by a property, but they will also fund your entire turn-around plans for the property as well. Because each hard money lender is unique, you should define your plans initially before you begin looking for the right hard money lender to work with.

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