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Real estate investors are sometimes in need of some quick funding to develop or renovate lucrative properties. While it is possible to find numerous lending institutions out there, finding one that can offer the kind of credit needed might be quite difficult. It gets even harder if your credit score is imperfect. Fortunately, you can turn to hard money lenders to obtain a loan. Approvals also take equally shorter periods.
Hard money loans are a type of secured loans. They mostly target real estate investors and are short-term loans. They are provided by private money lenders. If you, a real estate investor, find yourself in a situation where you want to buy a piece of property but are limited by money, consider taking hard money loans. These loans are offered by individual investors or small groups of investors. For a hard money loan to be processed, it takes about 5 to 10 days. This is quite a short period compared to that of the traditional lenders, which takes about 4 to 8 weeks.
This means that you only have to go through a couple of hurdles and you will be good to undertake your project. What’s more, hard money lenders are not put off by bad credit; something traditional lenders would never overlook. However, a hard money lender still has to see some proof of income in order to ensure that you are capable of repaying the full loan amount plus the interest charged.
You can use the money you acquire from a hard money lender to buy or renovate property such as land, commercial property, industrial property, multi-family residential homes, or single family homes. Before you get a hard money loan, the lender has to ascertain that you have enough equity in the property being used as collateral for the loan.
Overall, private money lenders are mainly bothered by your ability to pay them back. When assessing the deal, they look at the loan to value ratio (LTV). If your property has a low LTV, your chances of qualifying for the loan are higher. In addition to a low LTV, if you have a good history with the hard money lender, you will have higher chances of qualifying for a higher loan amount.
Pros of Hard Money Loans
1. Quick approval process
An upside to hard money loans is the quick approval process and funding. You can get the loan approved the same day you make your application and receive the funds in a couple of days. For hard money lenders to give you the loan, they only need to verify the following:
• Your history in fix and flip properties
• Your equity
• The value of your property
• Your cash reserves
2. Funding is offered even for property up for foreclosure
Hard money loans are ideal because they can finance projects that a bank or other lending institutions wouldn’t consider financing. Traditional lenders are concerned with getting their money back and avoid high risk investments. However, a hard money lender will give you the loan amount you need to even fix a property up for foreclosure.
Unlike traditional lenders, hard money lenders have more flexible policies. Being that hard money loans are offered by private individuals or groups, they can adjust the terms to suit the borrower’s situation and needs. These loans do not have a standardized lending process and the loan amount you get is based on the value of your property.
Cons of Hard Money Loans
1. They charge high interest rates
Being short-term loans, hard money lenders charge interest rates that are significantly higher than market rates. The rate is somewhat influenced by the fact these loans have a higher risk. The interest may range from 7 to 20 percent.
2. Short repayment period
Hard money lenders give you a short repayment period of 1 to 3 years. This means that you have to flip your property in the shortest time possible.
3. You are required to pay a lenders fee
Hard money loans also comprise of a lenders fee that ranges from 1.5 to 10 percent of your loan amount.
Real estate investors seeking an alternative lending option can check out hard money loans. These loans use the property as collateral, and are also known as asset-based loans. A hard money loan is often sought by those who need a quicker approval process or who may not have good enough credit to apply for a traditional loan. Lenders typically want to lend money to those who have reputable credit history and income because that shows that they will repay their loans in a timely manner.
However, not everyone can meet that criteria, so it might be a good idea to check out other lending alternatives like the hard money loan.
The Basics of Hard Money Loans
These loans are short-term loans that typically range in terms from 6 to 24 months. The interest rates are higher than a traditional loan, so shorter terms are much more desirable. The big perk of these loans is that they can often be closed in just a matter of days, which is critical for investors who are trying to win new projects. These loans create new opportunities for developers and investors to purchase real estate without having the capital upfront. This gives them better chances of success and a great return on their investment.
Another big factor that entices people to these loans is the adjustable repayment schedules. While traditional lenders are subject to certain laws and lending requirements, a hard money lender may not be. This means that they can work with investors to tweak payment schedules and get the terms that work best for the situation. Plus, they aren’t going to be as difficult to work with if you need to extend a payment or change your date, in most cases. They are more flexible, in part, because if you default on the loan, they get the property and that has more value than your loan to them, anyway.
Keep in mind that some lenders might not finance these loans for owner-occupied property just because of compliance and regulatory oversight that they are required to follow in financing these loans. These loans, however, are sometimes used to stave off foreclosure, so it isn’t impossible to get one for a property you are living in, but it isn’t always the most popular choice.
Choosing Hard Money Loans
Borrowers and investors can utilize these loans to get approval to finance any type of property that they want to invest in. This includes single and multi-family residential homes, as well as land investments, commercial properties, and industrial properties. Lenders may specialize in one type of loan or another, so be sure to ask right away what types of loans they offer and which they feel most comfortable with. There is no sense in wasting time if they can’t give you the hard money loan that you need.
Hard money loans are most commonly used for:
-Flipping a property
-Land and construction loans
-Loans in a short time period
-Buyers or investors who have credit issues
-Those who need unique alternatives to traditional lending
The fact that these loans can be funded in less than a week in most cases is a big selling point. Most loans take 30-45 days to close, after all. Plus, you can often get approved the same day. While you’re on your way to earning your profits with these loans, you could still be waiting for approval from your local bank or lender. Whether it is a credit issue or a time sensitivity that you are concerned about, this might be the lending solution that you are looking for.
Money Isn’t Free
When considering a hard money loan, remember that they often have associated fees, as well as higher interest rates than a traditional loan. The increasing competition in the market is driving these down and creating new options, but it is still a more expensive form of lending. The future of real estate deals lies in quick funding, and the benefits of hard money loans often outweigh the expense.