Are you wondering where you can find the money that you need for a great real estate investment opportunity? Your first inclination may have been to head to a local bank branch or to reach out to a mortgage broker. While these are common first steps to take when you have a real estate loan request, these are not the only financing sources that are available to you. The reality is that banks and credits unions are severely limited on the types of loan requests that they can look at. Many excellent real estate opportunities cannot be funded by banks and credit unions, but they could be very profitable to you if you can find a way to finance your plans. The good news is that hard money is another financing source that you can consider when bank loans are off the table.
What You Need to Know About Hard Money Loans
If you are like many people, you have heard about the concept of hard money, but you may not fully understand what it is or when it should be used. Like a bank loan, hard money financing is secured by real estate. However, hard money loans are substantially different from a real estate bank loan that you may be more familiar with. A hard money loan is underwritten and funded by a private lending company rather than by a financial institution. In some cases, a hard money loan is offered directly from a wealthy individual who views making a loan to you as an investment opportunity. These private money sources are not limited by strict underwriting requirements in the same way that banks are. Because bank loans have competitive pricing, loan requests that meet bank requirements usually are funded by banks. However, for many other scenarios, hard money may be a good fit. The unique nature of hard money loans usually creates a lower loan-to-value and a higher interest rate compared to bank loans. In addition, hard money often has a very short term, such as a 12 or 18-month term, with a final balloon payment.
How to Determine If Hard Money Is Right for You
Hard money loans do not have the financing terms that you may be accustomed to. The fact that these loans usually have a shorter term length followed by a final balloon payment means that you need to have a strategy for dealing with this balloon payment. For example, you may plan to refinance into a bank loan, but you will need to use the hard money loan to reposition the property or your personal financials so that you can qualify for permanent bank financing. You could also deal with the balloon payment by selling the property for a profit. To increase the chance of a big gain when you sell within a short period of time, substantial improvements may need to be made to the building or to the property’s income generation. In order to determine if a hard money loan is right for you, the use of a thoughtful exit strategy needs to be a legitimate option. It also needs to be an option that makes financial sense for you.
What It Takes to Qualify for Hard Money Loans
Qualifying for a hard money loans is often easier to do than qualifying for a bank loan. Private money lenders have increased flexibility to be creative with how they analyze loan requests. However, this does not mean that hard money is suitable for deals that do not make financial sense. When applying for your new loan, present the loan scenario so that the lender can easily identify all of the positive attributes of the scenario.
It can be frustrating to hit a road block with banks and credit unions when you are seeking real estate funding. However, when you open your mind to the possibility of using hard money to finance your project, you may be able to strategically take advantage of the real estate opportunity in front of you.