Whether you’re just starting your real estate venture or you’re an experienced professional, hard money loans are a convenient option for real estate investors to bring in deals. Hard money loans are often used for house flippers or real estate developers whose goal is to renovate or develop a property, then sell it for a profit. Hard money loans are issued by private lenders rather than mainstream financial institutions, such as banks, and offer you more flexibility and quicker access to money. Borrowers who cannot get conventional financing due to a recent foreclosure or short sale can still obtain a hard money loan if they have sufficient equity in the property that is being used as collateral.
If you’re not comfortable parting with a substantial amount of cash upfront to purchase real estate, a hard money loan may be the answer.
This article explains how hard money loans work when it’s best to use a hard money loan and how hard money loans will help secure deals for real estate investing.
What is a hard money loan?
A hard money loan is a short-term loan through which a borrower receives funds based on the value of the investment property they are using. Hard money loans are typically issued by private investors or companies as opposed to a traditional loan through banks or credit unions. Hard money loans are also generally higher risk and are of shorter duration.
The loans are usually around 12 months, but they can be extended to 2-5 years. The loan requires monthly payments of only interest or interest and some principal with a balloon payment at the end of the term.
The interest rates for a hard money loan will range from 10 – 15% depending on the specific lender and the perceived risk of the loan. Points can range anywhere from 2 – 4% of the total amount loaned. The interest rates and points may vary greatly depending on the loan to value ratio and the state in which you get the loan.
Hard Money Lending vs. Other Lending
Hard money lenders are more concerned with the property’s value rather than with the borrower’s credit (although this is still of some importance to the lender).
When the traditional lenders say “No” whether due to past bankruptcies, etc, the hard money lenders can still say “Yes,” which makes them risky and gave hard loan lenders a bad reputation in the past. While there is a negative stigma around hard money lending, if you pick the right lender and do thorough research, hard money loans can be a great financial opportunity to fund your next real estate investment.
In most situations, hard money loans can be funded within a week, sometimes even in just a few days, compared to the 30 to 45 days it takes to get a bank loan funded. You can also use a hard money loan to fund multiple deals at once or to kickstart your real estate investment venture if you’re new to
How Real Estate Investors Can Benefit from Hard Money Loans
The ideal customer for hard money loans are people who want to fix and flip houses or are fixing up their own homes to sell. In other words, someone who needs money fast to fix up a home and will then resell the home for the quick profit and pay back their lender.
Steps for Qualifying for a Hard Money Loan
The first step is to find a reputable lender. A good way is by attending your local real estate investor club meeting. These are usually well-attended by hard money lenders looking to network with potential borrowers. Ask other real estate investors if they can recommend a hard money lender. Real estate brokers, conventional mortgage brokers, and other real estate professionals may be able to refer you to an experienced and trustworthy hard money lender.
Once you’ve picked a loan provider, you need to provide them with the value of your property such as architectural plans for the property, as well as detailed budgets for construction, and your contractor bid sheets for repairs and renovation, so that the lender knows what expenses you will be incurring. Also, have documentation showing the value of the neighborhood and your particular property. Present a clear financial plan for your home project. Also, be prepared to provide W-2s, paystubs, bank statements and other items in your credit history.
You must present a reasonable plan that shows how you intend to ultimately pay off the loan. Usually, this is through improving the property and selling it or obtaining long-term financing later on. Lenders also focus on the “after repair value,” or ARV, which is an estimate of what the property will be worth once the renovation or development phase is complete.
Before you sign any paperwork from a hard money lender, review the terms of the loan with your lawyer. Private investors are subjected to very few regulations, so you should make sure your legal interests are protected. If your lender does not disclose any additional fees that might be included in the loan during your repayment schedule, this is a red flag. Interest rates and points charged by hard money lenders vary from state to state, so be sure to familiarize yourself with the common rates for your area as well.
For more information on qualifying for a hard money loan, please see: How to Get a Hard Money Loan Approval.
Hard money loans are a good fit for wealthy investors who need to get funding for an investment property quickly, without any of the red tapes that go along with bank financing. With hard money loans, real estate investors can acquire great deals and earn a good profit from properties that traditional banks wouldn’t bother handling. Getting a hard money loan takes on a big risk, so do your research to find a reputable lender and know what the risks are for you!
This article was written by Sacha Ferrandi, Founder and Principal of Source Capital Funding and Texas Hard Money. Sacha has over 20 years in the finance and real estate industries and has been featured on many distinguished platforms such as Fox News, Realtor.com and TED.