Hard money lenders can be a great option for people looking for funding for short-term real estate purchases. They allow you to get your money quickly, often as little as a week, they can provide you with flexible terms and they don’t do a deep dive into your credit history, preferring instead use as collateral the value of the real estate purchase you’re buying. There are some pros and cons to think about when considering hard money loans.
Following is a small list of the reasons that you should consider a hard money loan:
You get the money really quickly.
Hard money lenders can get you your money in as little as a week, making it a great option for people taking part in fast-moving real estate deals. Traditional loans take much longer, meaning that you’d miss out on time-sensitive, potentially lucrative deals.
You don’t have to have great credit.
Money lenders look at the value of the collateral that you’ll be using, which is usually the property that you’ll be purchasing. They don’t look at things like your credit history or your credit score, making it ideal for people who have problems in those areas.
You get more flexible terms.
Because you’re directly dealing with the individuals or organizations that will be providing these loans to you, you have a better chance at negotiating terms that work with your situation.
There are several downsides to choosing hard money loans that you need to be aware of.
There’s not a lot of oversight in the industry.
The hard money lender industry is not really regulated. This means that unscrupulous lenders can take advantage of unsuspecting borrowers.
These loans can come with a lot of fees.
These types of loans usually come with a lot of fees, including origination fees early prepayment penalty fees.
These loans tend to have high interest rates.
Hard money lenders usually don’t disclose their interest rates amounts, but they’re frequently quite high. This can make a huge difference in the amount of money that you end up paying when the loan is due.
The loans have short terms.
Don’t have arms longer than a year or two. This means that at the end of the loan your property needs to be finished and ready to sell. If the market is down or the property is simply not selling, you’ll be on the hook for the amount of the loan.
Alternatives to hard money loans
Now that you see that there are pros and cons to hard money loans, you may be interested in finding out about alternatives.
Home equity loans
Home equity is the difference between you owe on your home and how much it’s worth today. You can take a loan out against this equity in order to finance a short-term real estate purchase.
Home equity line of credit (HELOC)
You can also use a home equity line of credit. This means that instead of getting the equity in one lump sum, the equity is available to you as a line of credit that you can use as needed.
Business line of credit
A business line of credit is a line of credit that you get from a bank or other financial institution that you can use for whatever purpose you see fit. In your case, you’d use it to find your short-term real estate purchase. Business lines of credit are difficult to get, and make sure that you have your financial and credit ducks in a row.
There are many other ways that you can get money to fund your short-term real estate purchase. At the end of the day, you want to make sure that you are choosing a fiscally responsible route. If you do choose to go the hard money lender route, make double sure that you’re prepared to settle up at the end of the loan period.