Buying a house with fast cash and no documentation? Sound too good to be true? Well, if you are an investor it is true.
A hard money loan, also referred to as a private money loan or bridge loan, is a short-term loan often used by real estate investors to help finance a new project. Professionals in the real estate industry looking to develop or renovate a property to sell for a profit, such as house flippers, use this type of loan.
So You Want Cold Hard Cash? How About A Hard Money Loan?
Hard money loans are generally given only to investors and business entities such as an LLC and not individual consumers.
You wouldn’t just get a hard money loan to add that awesome new man cave to your house. You also can’t just get a loan to flip a house because you things it’s a fun idea. You’ll need actual real estate experience.
A hard money loan is also a type of asset-based loans. Asset-based loans require an asset that may be seized by the lender if the loan is not repaid.
In a hard money loan it is usually a mortgage that is used as the asset. These types of loans are often obtained from private lenders instead of traditional banks or credit unions. The process for receiving this type of loan will include having a detailed plan for your renovation project.
The interest rates for hard money loans are often higher than more traditional loans. These type of loans also have a higher risk than traditional loans.
Real estate developers may turn to hard money loans as an option when they are unable to receive a traditional bank loan. They may also be able to receive the loan much quicker than through a bank which is one of the benefits of this type of loan.
The process of applying for and receiving a traditional loan can take much longer than desired. A low credit score can also affect your ability to receive these types of loans. For real estate developers and investors trying to fund a project this can greatly hinder their progress and success.
Traditional loans often require proof of income as well as proof of your ability to pay back a loan in timely manner. If you don’t have a history of receiving and paying back loans you may not be able to receive a bank loan.
Why Not Just Go To The Bank?
While some people may prefer a traditional bank loan, there are benefits to receiving a hard money loan in the right situations. For some, a traditional loan may still be a better option and should be considered before hard money loans.
Hard money loans are ideal for house flippers, loans for land or construction, when you don’t have the credit or time for a traditional loan. Private money loans should only be considered for properties that you plan to sell quickly. They should never be used for purchasing a home that you plain to live in.
However, with real estate investments time may be a factor. If you already know you will be unlikely to receive a bank loan then you may want to begin the application process with a hard money lender.
It’s Fast. Get Through The Process Before You Miss That Opportunity.
Lenders of hard money loans are not going through a lengthy process of checking your credit history or reviewing your income. Because they base their underwriting guidelines on the value of the asset, they don’t need to be concerned about every detail of your financial standing. This can speed up the process so you can get your loan must faster.
In real estate there may be multiple offers and property that you need to purchase quickly so you don’t miss out on a great investment opportunity. Nothing can slow this down like a bank while trying to be approved for a mortgage. Even worse, you go through that process only to be rejected.
In some cases borrowers may be approved for a hard money loan the very same day that they apply. With a traditional bank loan it can take 30-45 days to be approved.
Want A Loan On Your Terms?
Unlike banks, private lenders often have the ability to be flexible with their terms. There is a possibility of negotiating terms that you are more comfortable with such as repayment schedules. Banks often have strict policies when it comes to loans and won’t be able to work with your specific needs.
With hard money loans through private lenders, each individual situation is taken into account. This allows for flexibility that large banks can’t give you. You may be able to negotiate repayment terms that work better for you.
It’s Easier to Apply, Less Boring Paperwork Required.
Hard money loans mainly require collateral which will usually be the property you are planning to purchase. However, private lenders can be more flexible and may consider some personal assets as collateral.
Applying for a mortgage through a bank can take months which can cause you to miss out on an investment opportunity. You would need to provide the bank with details of your income, bank statements and other documents that you’ll need to have ready for them to review.
Stop Wasting Time And Actually Get Approved
Hard money loans are still an option if you can’t receive a traditional loan due to bad credit history. If you are buying an investment property then you already have the collateral that is needed for a hard money loan.
The main concern for hard money lenders is the value of the property. Lenders only need to know that they can sell your property to get their money back if you can’t repay the loan. They often have little or no interest in your credit score.
I Watch HGTV, Should I Get A Hard Money Loan?
Who should consider a hard money loan? You’ll need to have a plan on how to renovate and sell your property to make a profit.
House flippers and other real estate developers will only own the property for a short time before selling for a profit, allowing them to pay off the loan quickly. For those who can repay a loan quickly, a short-term loan can be beneficial.
Lenders of hard money loans will want to consider how profitable your project might be instead of your credit. They may take a look at your previous work experience with similar projects as well as details of the property value and the work that will be done.
If you are planning to purchase a property to renovate or develop as an investment, you may not have the time to wait for a traditional bank loan. There is also the possibility of being denied by the bank based on your current income or credit history.
It’s Not All Sunshine and Rainbows, What You Should Know.
A money loan should only be considered in specific situations when a traditional bank loan isn’t a good or viable option.
If you have good credit, proof of income and don’t need to buy property quickly then you would still consider a traditional bank loan as your first option. However if a bank will not approve you for a loan or you need to receive the loan as quickly as possible to fund your project then a hard money loan could be a good choice.
There are some drawbacks to hard money loans to consider. Even if a hard money loan is your best option, you should be aware of these factors before choosing a lender.
A hard money loan can be more expensive than traditional loans. You may have to pay higher interest rates and other fees throughout the process.
Hard Money Loans have two factors to take into consideration when it comes to costs. This includes the interest rate and up front points.
Any loan from a private lender will usually have a higher interest rate. This is because it is considered high risk and this is the trade off for being more convenient and faster. Interest rates from private lenders usually start at 7-10%.
With upfront points, 1 point is 1 percent of the loan. Some lenders charge these points to make it easier to cover closing costs and other fees. They may also charge fees for underwriting, processing fees and document preparation fees.
The amount that the loan will cost you will depend on the private lender and the complexities of your project.
Overall, with fees and high interest rates, hard money loans can be very costly. It still may be worth it if you have plans to quickly make a profit on your investment and pay the loan off on time.
Less Time To Repay
Hard money loans generally have much shorter term lengths than traditional loans. This means you’ll have to be quick to make your renovations and be ready to pay back the loan in a short amount of time.
Most terms for hard money loans are around 12 months but some may be as long as 5 years. This may require you to complete your renovations quickly and sell the property as soon as possible.
You will need to have a plan in place to prove to the lender that you will be able to pay off the loan. Although they could always sell the property to get their money back, most lenders would prefer that the loan is paid off by the borrower.
Some lenders may also check your credit and check for any indication that you may not be able to pay off the loan.
If you are working with a hard money lender you’ll need to give a good estimate of how soon you can turn a profit on your investment.
How To Get That Paper.
The first thing to consider is the property that you plan to use as collateral for your loan. It may be a property you plan to purchase or one that you already own.
You can likely use a hard money loan for any type of property such as residential homes (single or multi-family), commercial or industrial.
You may need to find a hard money lender that specializes in the type of property you own. Many lenders do not accept every type of property so you may need to research to find one in your niche.
Hard money lenders usually prefer to lend to business owners instead of consumers. You’ll need to own an LLC, a corporation or some other business entity.
The property may be required to not be occupied by the owner. This means that the borrower may not live in the property used as collateral for the loan.
Make sure your hard money lender is willing to lend in the same state as the property used as collateral. You’ll also want to make sure you find a reputable lender.
Examples of projects that may qualify for a hard money loan may include property development and new constructions, house flipping and cash-out refinance.
How Much Money Can I Get When I Need It Yesterday?
In most cases, hard money loans can be obtained very quickly. You’ll need to begin the application process and present your plan to the lender.
Most lenders may approve your loan within a 1-3 weeks but under the right circumstances, some lenders may only take a few days. Be ready to discuss your plan for your property with the lender. You will need to give them the details of your project so that they know you will be able to pay off the loan in a timely manner.
The amount of money you may be able to borrow with a hard money loan is based on the LTV (loan to value). Most lenders will lend between 60-75% of the value of your property before renovations or construction.
You may also find a lender that lends based on ARV (After Repair Value). This is the estimated value of the property after renovations have been completed. However, this type of loan will usually result in a higher interest rate because it is considered a higher risk than loan to value.
Lending for residential projects often vary between $70,000 and $2,000,000 depending on the details of the project.
Just remember, a hard money lender is essentially a partner with you on your project. They want to know how you are going to use the money, what kind of rehab is needed and definitely want to see an exit strategy. Are you going to Fix n’ Flip, or Buy & Hold?
Either way, if you want to make money in real estate, you will have to keep an open mind when it comes to financing. All successful real estate investors have used private money loans at one time. Happy hunting and good fortune!