It doesn’t matter how much skin you’ve had in the game—hard money loans are a great financial tool for both newly-minted investors and seasoned pros alike. This form of financing provides access to fast cash for quick funding no matter how robust your portfolio may be. When a deal is on the table and time is of the essence, investors can’t wait around for the days, weeks, and even months it might take a bank to process a loan application. That’s why they turn to hard money loans for their immediate lending needs, as opposed to traditional loans.
There are several reasons why you might consider going this route, all of which offer a number of distinct benefits. Today’s post goes over the ins and outs of hard money loans, including what they are, how they’re different, and how they might help you as an investor.
What are hard money loans?
Sometimes called “bridge loans”, a hard money loan is a way to borrow money for a real estate investment without having to go through traditional mortgage lenders. Whereas traditional loans are backed by the creditworthiness of the borrower, a hard money loan uses the property as collateral. Proof of repayment is typically not required; rather, a lender will assess the value of the property itself in determining whether or not to issue the loan.
Hard money lenders are usually private individuals or companies that see value in this type of potentially risky venture, which is why their interest rates tend to be higher than traditional loans. However, the higher cost of a hard money loan is offset by the loans quick repayment terms. In most cases, hard money loans become due and payable after 1-3 years, compared to the 15- or 30-year loan structure of bank- and government-issued loans.
These lending instruments allow investors to finance short-term projects without having to pay upfront in cash or jump through all the hoops typical of most bank loans, which is why they’re very popular among house-flippers and real estate developers.
Source Capital Funding, a hard-money lender, gives a great explanation of when it’s appropriate to get a hard money loan.
To qualify for a hard money loan, you must follow these general steps, although the process may differ between lenders:
- Present the potential value of the property you want to purchase, including architectural plans, construction budgets, and contractor bid sheets. Hard money lenders want to know that they are making a safe investment, so be prepared to prove the value of the neighborhood, as well.
- Provide a clear financial plan for your real estate project. Most hard money lenders will finance up to 70% of the after-repair-value (ARV) of the home.
- Submit additional documents, if necessary. Most hard money lenders are only concerned with the value of the property—not the borrower’s personal finances. However, some may require you to show proof of the ability to pay for the remaining 30% of the project, which might demand documents such as W-2s, bank statements, or paystubs.
How is hard money lending different from other types of lending?
Because hard money loans are so different from traditional loans, they offer certain advantages that appeal to investors. Let’s take look at some of the unique attributes boasted by this type of lending.
- Hard money loans do not focus on credit score, income, or financial record
Within their investment career, it’s not uncommon for a real estate investor to make a bad bed. Rather than liquidating their assets or declaring bankruptcy, hard money loans may be used as a way to stave off foreclosure. In the event that bankruptcy is declared, it doesn’t have to mean their career is over. Despite a history of foreclosure, bankruptcy, or bad credit, a hard money lender may still approve a loan based on the property’s value. This means that investors new to the lucrative real estate market, without much cash in their pocket, may also use a hard money loan to turn their investment dreams into a reality.
- Hard money loans can be funded within a matter of hours or days
The process to underwrite and close a traditional loan can take months, as the loan application must go through several parties for approval and the money must be withdrawn from a circular pool of funds. Hard money loans can be funded much faster since the approval process is less involved and most lenders have access to “hard”, readily available cash-on-hand.
- Hard money loans are more convenient
It’s much easier to apply for a hard money loan than a traditional mortgage, which process can be tedious and time-consuming. In most cases, you won’t require stacks of supporting documents to be approved and can find out within minutes if you’re qualified.
- Hard money loans can be more flexible than bank terms
Although most hard money lenders use the property as collateral, they can be flexible with their terms and may allow you to instead borrow against your retirement plan, for example. Lenders evaluate each deal individually, and you may be able to negotiate your repayment terms or origination fees during the underwriting process. This is very different from corporate banking institutions that offer cookie-cutter mortgage structures.
How can real estate investors benefit from hard money loans?
If you’re contemplating how to finance your next real estate investment, hard money loans can get you funding in a matter of hours or days. You don’t need to slave away gathering documents, filling out forms, and submitting evidence of income; in most cases, you can apply and get approved for a hard money loan within a matter of a few minutes.
The time it takes to receive funding from a bank loan puts an investor at risk of losing out on a particular property. This makes the quick funding offered by private, hard money lenders especially valuable to large-scale real estate developers who can’t afford to deviate from their project timeline.
Traditional mortgages lock borrowers into debt for a decade or more with interest rates that can suddenly spike. Hard money loans, on the other hand, typically offer fixed interest rates and are repaid within a few years or less.
These types of loans are convenient for investors working with fix and flip properties. From small upgrades such as new carpets, window installations and kitchen faucet replacements, to larger upgrades like new plumbing, hard money loans can fund these projects quickly and efficiently.
Before you begin budgeting your next home renovation or property development, talk to a hard money lender and see how they may be able to help.
About the author: Corey Doane is a contributing editor for 365 business tips and Home by Hank. She has a B.S in Public Relations from San Jose State University and has experience in PR, marketing and communications.