When a traditional loan will not work, a Kansas City hard money loans provide an alternative means of financing a real estate purchase. However, hard money loans are not for everyone. Before you finance your next real estate purchase, learn the difference between traditional loans and hard money loans.
Traditional real estate loans are based on your credit history, your earnings, and the likelihood that the lender will get its money back. The loan terms often stretch over many years. By applying for a traditional loan, you open current and past financial history up to close scrutiny.
In essence, your reputation is the collateral for the loan. The entire process may take over a month to finalize, and many banks will not lend money for renovation projects. When you sign the loan papers, you are agreeing to a set interest rate and repayment terms. This is the type of loan your parents probably used to pay for the family home.
Hard Money Loans
Hard money loans are based less on creditworthiness and more on the ‘hard’ collateral you put up to guarantee repayment. The collateral may be real estate or other assets that the lender can sell and recoup its money in the event you default on the loan. Hard money loans are typically finalized in just a few days with a minimum of paperwork, and borrowers are expected to come up with a smaller down payment than with a traditional loan. The rates are often flexible and tied to a specific project, such a home build or renovation.
The reason this type of loan is not for everyone and every real estate project is because a hard money loans terms usually cover only on a few months, typically less than two years. Additionally, while hard money loans may be easier to qualify for, they typically come with a much higher interest rate, making them a poor choice for the average homeowner looking to keep the property, and loan, for a long time.
Types of Hard Money Loans
You will find three common hard money loan types. Each is designed to fit the needs of a specific subset of borrowers.
A bridge loan is designed for borrowers who have multiple real estate projects in process at one time. They are typically awaiting the sale of one property to purchase a new one. The loan ‘bridges’ the short interim until the first property sells. This type of loan is also referred to as:
- Interim financing
- Swing loan
- Gap financing
Most commonly used by borrowers who buy properties, fix them up for resale, and ‘flip,’ or sale, them quickly, the acquisition loan finances the purchase of the property.
When a borrower needs to finance new construction, he may apply for a hard money construction loan. The construction loan usually has a term of six months to a year. It may require interest-only payments during the term. The borrower may not receive all the funds at one time. Instead, the funds are doled out intermittently based on the percentage of construction that is complete.
Lenders make hard money loans on all types of real estate, including:
- New construction
- Multi-family dwellings
Hard Money Loan Acquisition
The first step to applying for a hard money loan is narrow down your project ideas to a specific investment property. Once you submit your application, it will go through an approval process that may or may not require the submission of financial statements and proof of insurance. Once all of the required paperwork is submitted, the process can be approved quickly, and you will meet with the lender to close the deal.