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If you’re looking for funding for short-term real estate deals, hard money loans are worth looking into. Hard money loans are short-term real estate loans extended to investors who are looking to make investments that they will hold for the short-term before reselling them. Hard money loans are very attractive to borrowers for their lenient credit criteria, their expediency when it comes to delivering the cash, and their flexible terms. While they can be great investment tools, there can be upsides and downsides to getting them. Check out below for some of the pros and cons of getting hard money loans.
Pros of Getting Hard Money Loans
They allow you to get your money quickly
Most traditional loans take anywhere from 30 to 45 days before you get your money. With a hard money loan, you get your money in as little as a week, often less. This makes them a great option for people who need to move quickly on fast-moving real estate deals.
They’re easy to get than other types of loans.
When a traditional bank is considering loaning you money, it looks at everything in your credit history. It will be on the lookout for things like bankruptcies and foreclosures, and it will take a hard look at your credit rating and your credit score. Hard money lenders will take a look at your credit, but that’s not what they’ll their decision on. They will lend you money based on the collateral you bring to the table, which in this case will either be the property that you’re intending on purchasing or property that you already own. These lenient terms make hard money loans an ideal option for people who have less than stellar credit ratings.
You can get more flexible terms with hard money loans.
Hard money loans are loaned by individuals or investor groups instead of traditional banks. This means that you can work directly with the lender to come up with more favorable terms for your loan. This sort of flexibility makes them a good choice for investors who might have unique buying situations.
Cons of Getting Hard Money Loans
They have high interest rates
Hard money loans have higher interest rates than other types of real estate loans, frequently going as high as 15 percent or higher. The reason that hard money lenders charge high interest rates is because there funding risky real estate loans that other lenders tend not to touch. Because they’re taking on this risk, they charge higher interest rates in order to cover their bases.
The industry doesn’t have federal oversight
The hard money loan industry does not have federal oversight. In the past, this meant that the industry was flooded with unscrupulous lenders who put borrowers in financial peril. The industry is a lot safer today, but you still need to do your homework to make sure that you don’t fall victim to predatory lending companies. Get recommendations from local real estate investment groups to see who other investors have gone to for loans. Do a simple Google search to check out the background of hard money lenders that you’re interested in working with. Do your due diligence to make sure that you’re not being taken advantage of.
There’s a large balloon payment due at the end of the loan period.
This is not necessarily a negative. A balloon payment is due at the end of the loan period because no payments are usually made during the month-to-month life of the loan. Many hard money lenders don’t require borrowers to make payments on the principal during the course of the loan. They may ask them to make interest-only payments or else no payments at all, instead opting for a single balloon payment at the end of the loan period,
The assumption is that the sale of the property will cover the amount that’s due. If the property sells, everyone is happy. If the property has not sold, this could spell trouble for the borrower if they don’t have a contingency plan in place. Contingency plans should include refinancing the loan if the property hasn’t sold.
Hard money loans are often revered in the world of real estate. While they give investors access to easy funding, borrowers that are new to lending should learn more about hard money loans to see if they are the right option for their investment ventures.
Common Questions About Hard Loans
Trying to decide if a hard loan is the right decision for your property purchases? During your research, be sure to cover the most basic questions and concerns related to hard money loans and their lenders. Consider the following information:
Should I pick out a property before applying for the loan?
Yes. Lenders base the majority of their decision of whether to grant the loan by look at the property that you are purchasing. In other cases, a lender will give you a hard loan if you use a property as collateral.
Can I take out a loan to cover the property’s purchase price, as well as the remodeling costs?
It isn’t uncommon for investors to use hard loans to rehab a property in order to sell it. The cost of materials and labors can be accounted for in the loan.
Some lenders in San Buenaventura, California will base the loan on the ARV or after-repair value of your property. This means that you will receive funding to fix your property immediately.
Other lenders will loan the money for repairs and the purchase price separately. In this situation, you will be required to submit paperwork with estimates of the expenses. You will receive a construction draw to cover these costs.
Are hard loans solely available to formal business structures?
While it is true that most hard money lenders only give loans to LLCs and other formal businesses, there are exceptions. Dedicated investors can find a lender that is willing to loan money to an individual—though it won’t be easy. The simplest way to qualify for a hard money loan is to form a business entity.
What inspections do lenders require?
Due to the fact that most lenders base the loan size on the worth of the property, borrowers need to obtain an accurate appraisal. For some lenders, borrowers will need to also receive an additional home inspection and complete a survey before being approved.
Do I have to show how I intend to pay the loan back?
Hard money lenders often require borrowers to have a set plan in place for repaying the loan. If a lender doesn’t ask about these details, it is still in your best interest to have a plan in mind.
Who regulates hard money loans?
Though many people believe hard money loans to be widely unregulated, this isn’t true. Lenders must adhere to the regulations set forth by their state’s real estate bureau. However, this does mean that there aren’t any federal regulations governing the industry.
Do hard loans always have high interest rates?
Borrowers can almost always count on hard money lenders to require high interest rates. As lenders can’t guarantee that the loan will be repaid with income, the hard loans are much riskier to make. Moreover, hard money lending is a business, so most lenders are out to make a profit. If they can find borrowers that are able to pay their rates, there’s nothing stopping them from charging as much as they do.
How am I supposed to pay the final balloon payment?
The last thing borrowers want to do is find themselves at the end of the loan with no way to make the balloon payment. While lenders aren’t expecting that borrowers will accumulate all the cash needed to pay the loan back through renting or a steady income, they do assume that borrowers will already have a solid plan to cover this final payment.
Borrowers have the option of extending the loan (at additional costs), refinancing their loan, or selling their property. If these options aren’t feasible for you, it isn’t wise for you to choose a hard money loan.
As easy as it may seem to obtain a hard money loan, there is still a lot of information that borrowers need to know. Before applying for a hard money loan, make sure you have all the answers to the most common questions regarding these loans.[flexy_breadcrumb]