Are you a real estate investor or home buyer who needs some money to purchase your next property? Maybe you’ve looked into a traditional mortgage and other types of loans people typically use when buying a house, but can’t seem to make any of them work for you. Perhaps what you need is a hard money loan.
What are hard money loans?
Before we dive into hard money loans, you need to know what hard money is.
Hard money = cold, hard cash. Instead of a line of credit that most lenders use, hard money lenders take actual money and give it to you. At a price, of course.
Hard money loans are typically short-term loans that you can get from hard money lenders (or private investors). These loans usually last between six months to a year (although some last much longer), and have higher interest rates (think 12-18%) and down payments than traditional loans.
What can you use hard money loans for?
You can use hard money loans for a lot of things.
If you’re a real estate investor, you can use hard money loans for rehab and flip deals that are just begging for attention.
If you’re a homeowner working on building your credit, you can use hard money loans, plus you should be able to refinance at the end of the loan period.
You can also use hard money loans instead of a bridge loan in order to buy commercial properties or to buy your new house while you’re waiting for some cash to come in.
You can also use hard money loans on land and construction loans. In fact, hard money loans are often used for these types of loans. The owner can build and sell quickly, meaning they can pay off the loan in under a year without jumping through hoops from the bank.
However, while hard money loans are fairly versatile, you can’t use them for everything.
Many hard money lenders won’t lend on houses that are owner-occupied. Those loans are typically higher risk and more paperwork is involved, which can deter many hard money lenders.
Why would someone need/want to use hard money?
There are many reasons someone might look into a hard money loan. Here are a few of the most common reasons.
More Attractive Offer
In all honesty, sellers don’t care if they get their money from a bank, your uncle Jerry, or straight from the source (you). So offering an all-cash offer doesn’t really give you an edge in that regard.
What a cash offer does mean for the seller is that the closing time will be significantly shorter. Now, that’s something they can get behind.
A faster underwriting process means they’ll be able to have their money sooner, and the property won’t be their concern anymore. An edge like that can be very attractive to a seller.
If you are into real estate investing, chances are your credit is tied up in another investment property. Even if you’re just a regular Joe with poor credit, you can use hard money lending.
Most hard money loans look at the property you are purchasing—not your credit scores. This is perfect for those whose only option is to use a hard money loan.
Hard money loans do come with high interest rates and often with a higher-than-typical down payment. Because of this, you’ll want to talk to your financial advisors before turning to hard money lending to make sure it’s the best option for you.
An Alternative to a Bridge Loan or Jumbo Loan
You may be looking for a hard money loan if you’re looking for a way to fund a property that you can’t qualify for with traditional loans or want to purchase a property before selling your house.
Bridge loans can be difficult to qualify for if you don’t have substantial savings while jumbo loans often have large fees and interest payments attached. Hard money loans are a way to circumvent all that qualifying and hoop-jumping.
While hard money loans don’t make a lot of sense for a long-term investment (the higher-than-normal interest rates are to thank for that), they work great for short-term investments.
If you’re planning on doing a flip or rehab, a hard money loan will give you the cash to get on it fast, which means you’ll be on your way to selling and paying off the loan in no time at all.
How to Find a Hard Money Lender
Finding a hard money lender isn’t all that difficult—in fact, there are lists upon lists of them on the internet.
The trick, then, is not finding a lender, but having them actually fund your project.
Hard money lenders may be less intense about a low credit score, but they are still going to cast a wary eye if you’ve gone bankrupt or foreclosed on a house recently. They’ll also want proof that the house they’re helping you invest in is a great choice.
If you really want to connect with a hard money lender, then you’ll need to do your research. Come at them with all the numbers included in the project, such as:
- Repair costs
- Return on investment (if it’s an investment property)
- Comps to prove the price is right
If everything you assemble adds up and the lender wants to move forward, there are a few things you must have to qualify, and they all begin with dollar signs.
Hard money lending is a game in which you need money to make money. Hard money lenders typically charge a down payment up front based off of a point system. Each point is typically worth between 2-4% of the property value, and most hard money lenders charge between two to four points.
The higher amount of equity you are able to show in the property, the better. Most hard money lenders lend based off the property’s loan-to-value ratio, so the more money you have in the property, the better. Some lenders will give you money based off of the after-repair-value, but that is rare.
If you are looking for a hard money lender in your area, assemble your data and head over to Google to find a hard money lender near you.
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