You come across an amazing real estate investment opportunity. You’re ready to make the leap, but you don’t have the funding. You consider reaching out for a traditional loan, but that process would take way too long for this once-in-a-lifetime opportunity.
This is the moment that many people consider hard money loans. If you haven’t heard of hard money loans, check out below to find out more.
What is a hard money loan?
Hard money loan as a loan extended to an organization or individual who intend to make an investment real estate purchase. These are not loans intended for people who are buying homes a bantam to live in. These are loans for Real Estate Investors.
How does a hard money loan differ from a traditional bank loan?
There are several ways that hard money loans differ from traditional loans. They include the following:
- Hard money loans are usually given out by organizations or individuals. Traditional loans are given out by banks.
- Hard money loans have extremely short repayment of anywhere between 1 to 3 years, while traditional loans have much longer periods usually last from 15 to 30 years.
- Banks that extend traditional loans take your credit history and your personal financial circumstances into account when making their loan determination. Hard money loans take into account the value of the collateral that you have, which in this case will be the real estate that you’re purchasing and eventually reselling. These lenders are much more likely to approve you even if you have bad credit.
Hard Money Loan Upsides
There are several benefits to hard money loans.
You Get Access to Your Money Really Quickly
Most hard money loan lenders can get you your money in as little as a week. This makes them an excellent choice for people who need to jump in on quick real estate deals since they won’t have to wait around for the amount of time that a traditional loan would take.
They Have Flexible Terms
The terms are a lot more flexible with hard money loans since you’re going to be borrowing the money from organizations or individuals. This means that if you need specific repayment terms or a special way of handling things, the hard money loan lender is more likely to be able to work with you and customize a plan that works best for your circumstances.
It’s Relatively Easy to Qualify
It’s much easier to qualify for a hard money loan than a traditional loan. Hard money lenders are primarily interested in the value of the property that you’re going to be purchasing. They will be using that as your collateral, so they’re less interested in what your credit score is or your personal financing situation. The only time that a hard money lender needs to look at a credit score more closely is if it’s making the investment loan to a consumer. The rules for loaning money to consumers are much more strict than those governing lending money to investors and businesses.
You’ll Be Able to Grow Your Business Faster.
Since the money is available really quickly, you’ll be able to act fast on investment opportunities that pop up.
Hard Money Loan Downsides
There are several downsides to hard money loans the you should be aware of.
They have high interest rates.
This can make the final payment amount extremely high, putting it out of reach for some investors. While it may not be an issue for others, it is good to be aware of how those rates will impact the final price.
There’s very little oversight when it comes to hard money loans.
This means that it can be easy for someone who is not well versed in the field to get taken in by an unscrupulous lender. Do your homework, and reach out to other investors to find qualified reputable lenders so that you don’t get taken in.
They have high fees.
These fees include things like underwriting fees, construction draw fees, early payment penalties and the high interest fees, and they can all impact your final payment amount.
They have short loan terms.
This means that at the end of the loan, you’re going to have to pay back the loan in full. You’re going to have to either be ready to sell the investment property at the end of the loan, refinance it into a more traditional mortgage or apply for an extension. If you’re not prepared to do any of that, you can get to serious financial trouble with the lender.
A hard money loan can be an extremely beneficial real estate investment financial tool if you know exactly what you’re doing, are comfortable with the lender and I prepared to make the payments in full at the end of the loan. Speak to a financial advisor to find out if this type of loan make sense for your investment purposes.