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When obtaining a loan to purchase investment properties, the process can be difficult. Since banks prefer those purchasing residential properties, as well as those who have excellent credit, real estate investors who have had past problems with bad credit or other issues can be left out of the equation. However, as the popularity of hard money loans has increased in recent years, more real estate investors have found this to be a convenient and useful source of financing for various projects. But to use these loans as effectively as possible, it is important to know as much about them as possible.
The Property is Your Collateral
Unlike traditional mortgages where the bank looks primarily at your ability to repay the loan, a hard money loan lender looks instead at the value of the property you are wishing to purchase. Thus, the property itself becomes the loan’s collateral, making it much easier for you to be granted the loan. Since the lender will know that in the event repayment is not made they will obtain the property, they have little to lose. Because of this, they are generally willing to provide funding for various types of investments, such as construction projects, new businesses, and fix-and-flip properties.
Short Payback Periods
If you obtain a hard money loan, be prepared to pay it back much faster than a traditional mortgage, usually in no more than 12 months. However, depending on the lender you use and the circumstances surrounding your investment project, a lender may give you as much as three years to pay off the loan. But unlike a mortgage, you will not be making equal monthly payments toward principal. Instead, your payments will be interest-only payments, with a balloon payment at the end to cover any remaining principal, interest, and fees.
Easy and Quick Process
For many investors, waiting weeks for a mortgage loan to be approved is out of the question, especially if a property needs to be purchased as quickly as possible. By choosing a hard money loan, the ability to have cash in your hand is made much faster. Since these loans are made by private individuals and institutions that are required to follow few if any regulations, they can put money in your hand in less than one week in most cases. Along with this, the application process is much easier and convenient, since the lender is not wasting time doing credit checks and other time-consuming tasks.
Pay Attention to the Details
While there are many benefits associated with hard money loans, there can also be numerous pitfalls of which you should be aware. For starters, the interest rates on these loans can be quite high, often well into double-digits. Along with this, there will be numerous fees added to these loans, such as origination fees, underwriting fees, and any fees associated with early payback of the loan. And of course, since the payback period will be far less than a mortgage, make sure your investment plans are sound. Otherwise, you may either be foreclosed upon by the lender, or find yourself having to refinance the property, often at a much higher interest rate.
All Lenders are Different
While all hard money loans have basically the same financial details, that does not mean all hard money loan lenders are alike. While one lender may have little problem providing you with funds for a construction project, another may instead choose to focus primarily on fix-and-flip loans. Therefore, always ask other investors in your area for information about various hard money loan lenders who may be able to help you secure the financing you need. By doing so, you will have a number of options available to you in regards to financing your latest project.