The Advantage of Hard Money Loans
Real estate investors often come across the need to have financial support to fund their projects. Whether it’s purchasing a property, rehabbing a fix-and-flip, or refinancing an existing asset, you will need financing. Even though conventional bank loans are a popular option to consider, they are not so easy to get. That’s why hard money loans have become a common alternative among real estate investors. Let’s compare the differences between hard money loans and conventional bank financing. Then you can decide what option to select for funding your real estate investments.
What Are Hard Money Loans?
Hard money loans are a type of asset-based financing provided by private money lenders rather than conventional banks or mortgage lenders. The loans are issued based on the asset itself – usually 70% or less of the property’s projected after-repair value – rather than the borrower’s credit score or financial history.
Hard money comes from private lending companies or individual investors looking to earn higher returns by financing real estate deals. The loans typically have higher interest rates and fees compared to conventional bank financing, but offer much quicker approvals, easier qualifying, and faster funding.
Advantages of Hard Money Loans
While more expensive, hard money loans provide several unique benefits for investors in real estate deals:
- Speed and Convenience
The biggest appeal of hard money loans is that investors can get approved and funded extraordinarily quickly, usually in a week or less. This enables investors to jump on time-sensitive deals right away without losing the opportunity.
- Flexible Qualifying
Hard money lenders focus more on the deal itself – the property, location, ARV, exit strategy – rather than the borrower’s financials. This allows more investors to qualify.
- Refinance and Rehab Funding
Hard money loans can fund the purchase of an investment property, but they really shine for refinancing or rehab funding. Investors can tap hard money to pull cash out of existing assets or fund repairs to get properties renovated and sold for a profit quickly.
How Do They Compare to Conventional Loans?
While hard money loans have their advantages, conventional bank financing does provide lower costs and rates in many cases. Here are some key differences:
- Interest Rates and Fees
Hard money loans typically have interest rates from 8% to 15% and origination fees of 2% to 10% of the loan amount. Conventional loans offer significantly lower rates and costs.
- Qualifying Requirements
Conventional lending has much tougher standards for credit score, income docs, financial history. Hard money focuses more on the real estate deal metrics.
- Funding Time
Hard money lenders can fund loans in a few days, while banks typically take at least a month (often longer). Speed is essential for time-sensitive deals.
- Loan-to-Value (LTV)
Hard money lenders generally lend up to 70% LTV on an after-repaired value basis. Banks lend up to 80-90% LTV but on current appraised value.
Are You Ready To Start Investing?
Now you are aware of the differences between hard money loans and conventional bank financing. If you decide to go ahead with a hard money loan for your next real estate investment, make sure to stick to a reputed lender. This is where you can contact us at FlipCo Financial. As a leading hard money lender in Houston, we provide the money you need with a fast turnaround time. Contact us today to get started.