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.