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When investors are making a real estate purchase, they can sometimes be patient while applying for a mortgage. However, in many cases, they may need the money for the purchase as quickly as possible to keep other investors from buying the property. When this is the case, obtaining a hard money loan may be the best option. With an approval process of often less than one week, little concern about the investor’s ability to repay the loan, and providing flexibility for use in various projects, these loans can often be the solution to an investor’s money problems. However, to be used as effectively as possible, investors should know as many details as possible about these loans.
Investment Purposes Only
In most cases, a hard money loan is used only for investment purchases, and not for those purchasing properties in which they will live. Instead, these loans work best for investors seeking to buy fix-and-flip properties, where they will buy, repair, and sell quickly at a profit. For other investors, hard money loans work well in starting construction projects much faster than anticipated. As one of the biggest perks of these loans, they can be used for many different types of investments, so it pays for an investor to seek out a hard money loan lender to discuss their plans in greater detail.
Finding a Hard Money Loan Lender
Since these loans are not made by traditional banks, some investors may think it will be hard to locate a lender. However, that is usually not the case. In most instances, an investor can simply ask other investors or real estate professionals they know, which will often lead them to numerous sources of these loans, which are generally private individuals and institutions. For best results, it is recommended an investor meet with several lenders if possible, allowing them to compare loan terms and conditions before making a final decision.
Hard Money Loan Terms
In many ways, these loans differ from traditional mortgages. One of the biggest differences involves the payback period, which is much shorter for a hard money loan. While a mortgage is paid back over 20-30 years, a hard money loan is often paid back in only 12 months. Because of this, it is vital the investor have a solid plan in place to sell the property they are buying within this time frame, or else they will risk not being able to pay back the loan on time. Along with this, a hard money loan does not have equal monthly payments applied toward principal, but instead interest-only payments, with a large balloon payment as the final payment.
Financial Difficulties are No Concern
When applying for a bank loan, much emphasis is placed on an applicant’s past financial history. Thus, if bad credit, bankruptcies, or other difficulties are in a person’s past, the loan will likely be denied. However, when applying for a hard money loan, past financial problems do not matter to the lender. Since the property being purchased will be the loan’s collateral, the lender will come out ahead no matter what happens. Whether the loan is paid back on time, extended by the investor at higher interest rates, or the property is foreclosed upon by the lender, the lender generally has nothing to lose by providing the funding for an investor’s project.
Investigate Other Funding Sources First
Before committing to a hard money loan, it is best to investigate as many different financing sources as possible. Since hard money loans have very short payback periods, double-digit or higher interest rates, and many fees associated with them, they can sometimes cause more problems than anticipated for an investor. Therefore, before signing on the dotted line, make sure all financing sources have been exhausted.