Could Hard Money Loans Be Right For You?
Did you see those late night infomercials on TV that say you can get hard money loans at the click of a mouse?
You know the ones I’m talking about. The ads give the impression that you too could get a quick buck for any wild idea.
But here’s the truth – hard money lending is not for everyone. These loans are specialized financial tools for specific purposes.
I want you to know exactly how that loan works so you know exactly what you are doing!
Could Hard Money Loans Be Right For You?
To answer this question you must know what hard money loans are. In essence, they are short-term, asset-based loans offered by private lenders who fund real estate deals. Hard money lenders look to what a property could sell for, not what a borrower can afford. The underlying property is the collateral that secures the loan.
Lenders are willing to be accommodating as long as the expected value of a property after repairs is enough to cover the loan.
Hard money loans, which come at higher rates of interest and with more accelerated repayment schedules than conventional mortgages, can still make sense for investors who are looking to close a deal quickly.
Now that we’ve got the fundamentals down, when are these loans most useful?
Typical Uses
Real estate investors with an ear at the door and one eye on the bottom line know that there are times when you must move quickly to lock in what might be a very short window of opportunity.
It is for this reason that an investor will turn to hard money lending as their loan of choice when they have an opportunity coming across their desk. Here are a handful of examples:
Fix and Flip Projects
These hard money loans provide a rapid source of funds to buy and renovate distressed homes to re-sell at a profit, and they’re a good fit for the fast turnaround of fix-and-flip investments.
Buying Vacant Land
Hard money lenders help investors buy raw land, paying with the land, in turn entitling the lender to at least a profit. On the downfall, investors can acquire land at a significant discount and re-sell it to those who desire to develop for profit, after all.
Construction Financing
Hard money loans fund the initial building projects that can’t be accomplished without capital – for example, erecting a house from the ground up. Investors might buy a piece of the loan as the construction progresses.
Bridge Loans
Bridge loans provide capital for a short time (usually only a few months) until long-term financing can be arranged. Hard money bridge loans can act as a back-up when other types of financing unexpectedly fall through.
Evidently, these loans will often be available to address temporary funding requirements that demand a high degree of immediacy and action. However, how are these loans any different to standard bank loans?
Key Differences
Hard Money Lenders
- Prioritize a property’s projected value over personal finances
- Provide higher loan-to-value ratios up to 80%
- Streamlined underwriting funds loans within days
- Typical interest rates from 8% to 15%
- Shorter loan terms from 6 months to 3 years
Banks
- Check borrower’s income, credit score, and financial history
- Lower loan-to-value ratios around 70%
- Slower underwriting takes weeks or months
- Lower interest rates from 3% to 6%
- Longer 15 or 30 year loan terms
There are good things and bad things about each of these sources. A private hard money lender loves speed. It’s all about the liquidity of the real estate. If a property has potential, he can lend. But a bank is interested in your personal finances, and will lend you money at a lower rate – for as long as it takes (a decade or more, typically) to repay that loan.
Is Hard Money Right For You?
If you’re trying to close on an opportunity that demands quick financing but doesn’t fit the traditional criteria for a bank loan, these loans enable you to take advantage of time-sensitive buy/sell deals.
But if you can get your own bank loan at a lower rate, that might be a better deal than hard money financing.
Our team here at FlipCo Financial would love to talk about hard money loans with you and get you on a path of successful investing. Contact us here on our website or give us a call!