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Each year in the United States, hundreds of billions of dollars pass through the hands of buyers and sellers of real estate. The majority of these transactions rely on some form of financing to get the deal closed. For most Americans looking to purchase a home, the preferred source of financing is a traditional mortgage.
Mortgages have been around for as long as America has existed. Over that time period, lenders, usually large corporate banks, have perfected the underwriting process. Modern mortgages allow homeowners to significantly leverage their capital while paying relatively low rates. These financial vehicles allow home buyers to get into real estate that would otherwise take them decades of saving to be able to afford.
But in order to keep costs low, mortgage lenders tend to be very strict as to who qualified for a traditional mortgage. The downside of these lending standards is that many people do not qualify for a traditional mortgage. For the majority of potential home buyers, having a mortgage application denied is a good indication that credit should be improved and income should be stabilized and probably increased.
However, some potential buyers may be unable to obtain a mortgage for other reasons. Mortgage lenders often stay away from certain transactions. This include homes that have serious defects that materially affect the marketability of the property, as well as situations where a buyer is involved in more than one real estate deal simultaneously. In these situations, real estate investors who know their markets may want to turn to hard money lenders as an alternative to traditional mortgage financing.
What is a hard money loan?
Albany hard money loans are a form of short-term financing that is usually issued by individual investors or groups of local investors. Unlike mortgages, they usually have few or even no lending criteria, making them flexible and giving savvy real estate investors wide latitude to structure deals.
Albany Hard money loans often have considerably higher interest rates than mortgages, but they also can have vastly reduced up-front costs. For investors who are looking to maximally leverage their capital, hard money loans can be a powerful tool.
For example, a $100,000 real estate purchase using a traditional mortgage may require the buyer to come up with as much as $30,000 or more out of pocket. The same purchase using a hard money loan will typically not require more than $5,000 in cash outlays. In many cases, investors who have long-established relationships with hard money lenders may be able to structure deals in a way that does not require any out-of-pocket expenses on the part of the borrower. These deals are known as zero-down purchases, and they can almost never be carried out using traditional mortgages. But savvy investors who know how to play their local market can often work out such deals, and these can be a huge edge for market-wise fix-and-flippers.
Hard money is fast money
Another huge advantage of hard money loans in Albany is that when it comes to closing timeframes, they can often be as good as cash. In hot real estate markets, where the average selling time for new listings may be measured in weeks or even days, speed of closing becomes a primary concern for both buyers and sellers. Because mortgage approvals can easily take three months or longer, sellers become hesitant to deal with buyers using mortgage financing if cash purchasers are interested in the property.
But with hard money loans, it is often possible for investors to get the purchase amount transferred to the seller within a few days, making closing timeframes similar to those of cash purchasers. This increased speed can give investors using hard money a decisive edge in kinetic markets, allowing them to close on the best deals while those using mortgage financing are left in the dust.
Delancey Street is here to help
Delancey Street is a premier Albany hard money lender. We have over $200 million in funding available for potential projects. We We look forward to hearing about your project, and how we may be able to help. Regardless of the size of your hard money loan, we encourage you to reach out to us in order to learn more. We take on deals that other lenders say no to – because we look at the big picture.
When seeking out a real estate loan, the usual process for most people is visiting a bank to apply for a mortgage. However, since this can be a time-consuming process and be prohibitive to those who have problems with bad credit or bankruptcy, other options such as hard money loans may make more sense. A different type of real estate loan, hard money loans offer such benefits as easy application and approval processes, large amounts of money in only a few days, and flexibility to be used for many types of investment projects. Yet despite these many perks, they also have many aspects that can lead to financial difficulties if investors do not use them wisely. To learn more about these loans, here are some important details to remember.
Short Payback Periods
If you seek out a hard money loan, be prepared to pay back the loan far quicker than a regular mortgage. Instead of having decades to pay off the loan, your lender will expect payment in full within no more than three years, and in most cases only 12 months. Because of this, you should always have a plan in place that will guarantee the property you purchase will be sold quickly enough to allow repayment of the loan. If this does not happen, you may face not only additional fees and higher interest rates if you apply for an extension, but also possible foreclosure on the property by the lender.
What About Collateral?
When applying for a hard money loan, the collateral used for the loan will be the property being purchased. Instead of examining the applicant’s financial history to determine their ability to repay, the lender will be more interested in the property’s loan-to-value or after-repair-value ratios, both of which will determine how much money they are willing to lend. As an example, if the property is valued at $100,000, the lender will probably lend $80,000 toward the project, meaning the investor will only need $20,000 of their own money to complete the purchase.
Private Individuals and Institutions
Instead of getting a hard money loan from a local bank, investors will instead be working with private institutions or individuals to secure these specialized loans. While the advantages of this include quicker approvals and greater flexibility in how the loans can be used, the downside is there are few if any regulations surrounding these loans. As a result, the lenders often charge very high interest rates, tack on a variety of fees, and can essentially create any loan terms they wish, so long as the applicant agrees to their terms.
Plan Ahead of Time
If you decide to pursue a hard money loan for an investment project, have a plan in place well ahead of time. For example, if you are planning to purchase fix-and-flip properties with the loan, make sure you are not stuck in a buyer’s market, where the properties may not sell as fast as anticipated. Since you may only have one year to pay off the loan, always be sure you are virtually certain your plans for the project will come to fruition in time to pay back the loan. Otherwise, foreclosure, refinancing, and higher interest rates and fees may be on the horizon.
Ask Plenty of Questions
When meeting with a hard money loan lender, don’t be shy about asking as many questions as possible to make sure you understand how the loan works. For example, always ask about the payback period, interest rates, how much experience they have in providing these loans, and if they have a valid real estate broker’s license, since this is a requirement for those offering these loans. By asking these and other questions, you can be sure your lender is reputable.