People know that the usual place to get a loan is a bank or credit union. The problem with such traditional lenders is that the approval process can take time and delay closing on properties. Real estate investors who are trying to flip properties can lose deals they find if they have to wait for loan approval through traditional lenders.
After the Great Recession of 2008, bank lending also tightened up a bit, making it more difficult for small businesses and real estate investors to qualify for traditional loans. This is when Lending Tree reports there was an increase in hard money business loans.
According to Fundera, traditional loans, especially real estate loans are for long periods of time. Hard money loans are based upon collateral and are designed to be for shorter terms, such as for one to three years. This allows real estate investors to do their repairs and refurbishment in a short window of time, then flip their properties.
The reason that hard money loans can be approved so quickly is that the loans tend to be approved based more upon the collateral (in the case of house flipping, the house and the property value), rather than being based upon the credit worthiness of the borrower. This also makes the application process quicker because the lender requires less paperwork in the application.
Because hard money loans are short term, they are riskier loans for the investor. For this reason, investors usually will only fund 70 percent of the value of the property. They want the borrower to be exposed to enough risk to have them be vigilant and committed to making the payments. If the borrower cannot repay the loan, the hard money lender will take possession of the collateral.
Reasons for Using a Hard Money Loan –
According to TheBalance.com hard money loans are not for every loan situation. They are not for situations where the borrower expects they will live in the home or on the land they have purchased. Such a situation requires a longer term loan. Hard money loans can have higher interest rates, sometimes double digit interest rates, due to the risk. One has to remember that there will often be an appraisal fee of around $300 to $500 and that a lender fee in points will also be a part of the loan package. For this reason, hard money business loans need to be approached with care for highly specific situations on the part of borrowers.
When Speed of Closing is Necessary –
Hard money loans are desirable when there is a need to close quickly. An example would be a situation in which there may be multiple offers on one property. Hard money loans can be closed in days, not weeks or months, when the property does not have issues and the borrowers get their ducks in order quickly.
When One Needs a Customized Repayment Timetable –
Since hard loan lenders are private investors, and do not have to follow outside guidelines or dictates, they are able to construct repayment schedules that can meet the needs of the borrower’s situation.
When Approval from a Traditional Lender Might Not Happen –
Again, the private hard money lender is mostly, but not exclusively, looking at the value of the collateral and less at the borrower’s ability to repay, so hard money loans are often easier to obtain for real estate investors who are trying to flip desirable properties.
Where to Get a Hard Money Loan –
One great resource is the list of the best hard money lenders for 2019 created by FitSmallBusiness.com. FitSmallBusiness is an online resource for small business owners. For each hard money lender recommended (seven in total, out of the 20 reviewed), they provide the lender’s rates, terms, qualifications, a description of the application process, and reviews. This is an excellent resource and overview for anyone who has a desire to seek a hard money loan.
Fitsmallbusiness.com also has a directory of for the entire state of California, if you want to focus upon local lenders. For each hard money lender in the state, 12 pages’ worth, there is a profile that they have written about that lender.