The real estate market would be far less complex if there was one loan that suited every homebuyer’s needs. Often times a real estate purchase requires an unconventional mode of financing.
For example, investors will use what is known as hard money loans to finance a real estate purchase. These types of loans can help if someone needs to buy a home fast or lose out on a good deal. Here are some facts about these loans to help you make smart real estate investments.
What Are Hard Money Loans?
Hard money loans are commonly used in real estate investing. Instead of qualifying for a traditional mortgage based on your ability to repay a loan, these loans are centered on the value of a property. The most common types of hard money financing investors use include:
• Fix/Flip Financing- You can use fix/flip loans to rehabilitate a home fast so they can resell it quickly.
• Bridge Loan- These loans let you buy a property for the sole purpose of selling it right away. Some people use bridge loans to make a down payment on a property until they sell the current home they own.
• Construction Loan- Real estate developers often use this type of hard money financing to complete new construction.
• Other Loans- Other types of hard money financing exists for different types of purchases other than real estate.
When to Use Hard Money Loans
Hard money loans come with plenty of value, but they also involve some steep pitfalls if you do not use them correctly. Here are some pros and cons to help you decide if you should use a hard money loan.
• Fast Financing- A traditional mortgage can take weeks or months to finish. A hard money loan can give you cash in hand in less than a week.
• Minimal Requirements- Lenders who issue hard money loans are not as interested in your income or credit score as they are with the value of your property. If you find a really great deal on a property, you will find a hard money lender ready to give you financing.
• Simple Terms- Hard money lenders usually give you easy terms based on individual circumstances. Large lenders do not offer custom loans built around a borrower’s current situation.
• Expanded Portfolio- If you are a seasoned investor, hard money loans give you an opportunity to expand your investment portfolio using your ability to quickly obtain large amounts of financing.
• Higher Interest- The interest rates on hard money loans are much higher than traditional mortgage loans. There are instances where you will pay a double-digit rate.
• Limited Regulations- Unlike regular mortgages, there are very few regulations that govern hard money loans. You must educate yourself on these loans before you decide to use one.
• Above-Average Fees- Traditional lenders are not allowed to charge excessive fees to borrowers. Hard money loans do not have the same regulations regarding fees, so typical charges such as the origination fee are much higher.
• Short Terms- Instead of paying off a loan in 15 or 30 years like you would on a traditional mortgage, hard money loans have short terms that range from one to two years. You will need to get an extension if you cannot pay back the loan in a short amount of time.
Final Thoughts on Hard Money Loans
Hard money loans are common in the real estate investment world. In most cases, you cannot use these loans to buy a primary residence. Hard money lenders consider the value of the investment, and not your repayment ability. Although they are not as complicated as a regular mortgage, they can get expensive if you have not done your homework the higher than average interest rate and fees.