When a traditional mortgage lender becomes nonfunctional, real estate investors opt for a hard money loan. The hard money lender’s collateral is the property that still serves as the asset. Thus, this type of loan is an asset-based loan. Your credit history, as well as your income, has a significant effect on the approval of a traditional loan. Traditional lenders prefer people that have a reputation of repaying their loans.
However, regardless of how secure your credit and income might be, it so not a guarantee that you will get a loan. Loan processes are also lengthy and invasive. A hard money lender uses a different approach. They lend money depending on the collateral available. Thus, your credit history will not be an essential consideration for a hard money loan.
Nevertheless, hard money loans are not meant for everyone. Some situations are more suitable for this type of loan than others. A typical investment trend is flipping houses. If you do not have the capital to pay beforehand for a house, you should consider taking a hard money loan and buy the property. During this short period of ownership, you can remodel the home and sell it for a profit.
How It Works
The period through which you can have access to a hard money loan is typically between six months and two years. The period is shortened because the interest rates with this loan are higher than the traditional loans interests. Thus, as a real estate investor, the longer you stay with the loan, the higher the payment cost you will incur. You can technically use the proceeds of the loan for anything you want. For example, you can use the funds to invest into your new wallet manufacturing company.
However, the loan has the advantage of giving you the ability to close on a property bid faster. Also, you can start the bidding war on the property you want to buy next. Investors and developers use hard money loans because they allow them to buy more properties. It also allows them to engage in more deals even though their starting capital is not massive. Hence, they make significant returns on their investment.
The Difference between Hard Money Loan and Traditional or Direct Loan
Many factors differentiate traditional loans from hard money loans. The most common difference is the level of leverage that these types of loans offer investors. Hard money loans provide a more significant advantage to the borrower making them close and fund deals faster.
As mentioned above, hard money lenders consider the value of the property and not the borrower’s credit history. Even when the credit history and experience is considered, the loan programs are still flexible enough to offer loans to any borrower. All you need to have is a decent deal and borrower profile.
2. Repayment Schedules
The underwriting process lacks flexibility with traditional and direct lenders. Hard money lenders, on the other hand, can change their repayment schedules because of their versatility. They are not held to specific regulations and guidelines. Thus, they can vary within the contract.
Many of the hard money lending organizations do not concern themselves with your position financially. Thus, the loan process moves quickly. Some of these loans can close in a few days if the property does not have issues and the borrower is prepared.
Types of Hard Money Loans
1. Acquisition Loan
An acquisition loan is a loan that offers to finance with the intention to purchase property only regardless of the purpose of resale or conversion.
2. Construction Loan
Hard money construction loans finance new residential or commercial construction projects in installments. They only take six months to a year, and they require interest bundled in the loan.
3. Bridge Loan
A bridge loan otherwise called interim financing is short term, and it leverages the equity that the borrower owes on a property. They are ideal for investors with multiple projects happening at once.
Types of Properties
You can get a hard money loan on any property. However, check whether you will get a loan on a property that is residential owner-occupied. Also, consider if it is a fix and flip or a fix and hold case.
Getting a Hard Money Loan
First, identify the property for your investment. Then submit your information for the application. You will be required to present information about the property, proof of income and a personal financial statement. However, some deals can be different. After submitting the information, wait for the underwriting process to approve on the agreement, and if approved you proceed to close.