Hard money loans have been in the market for more than seven decades. Yet, many people do not really understand how they work. Or perhaps they have a negative presupposition about this type of loan. When some hear of hard money loans, they think of shady lenders taking advantage of unsuspecting investors.
The truth is, hard money loans aren’t as shady as some people may make you believe. These are regulated loans offered by private lenders to real estate investors. They come with fewer restrictions compared to traditional mortgage loans. And because of the high risk the lenders are willing to take; the rates are a bit high.
What are Hard Money Loans?
Hard money loans are short-term, quick loans common among real estate investors. They are a great alternative to traditional bank loans. Once the investors qualify for the loan, they need to repay it within a short period. Often, lenders expect the investors to quickly obtain the property using the loan and sell it to get the money back. Term length may vary from six to eighteen months, but not more than three years.
Hard money lending rates vary from 8% to 18%, depending on the location and individual lenders. The loan also comes with some fees, such as origination fees often charged at 1-3%. Most lenders also require renovation estimates from a contractor. That way, they will know how much the property is worth in the real market.
How Do Hard Money Loans Work?
Hard money loans, unlike bank loans, come from private investors. These loans come with slightly higher interest rates but more friendly requirements. Hard money lenders approve loans regardless of credit history. They only use the property you want to buy as collateral. Based on the property’s estimated value, lenders will give loans up to 65% to 75% of the property value.
Even then, most do not accept owner-occupied residential properties. That is because there are lots of regulations governing this type of property. After making a hard money loan application, the approval process will take one to two weeks. If you default on the loan, the lender has the right to sell the property and recover their money.
Pros and Cons of Hard Money Loans
Like any other money lending option, hard money loans come with some pros and cons. What’s worth noting is that hard money loans work best for specific individuals than others. These include people with a bad credit score or those in need of quick financing. It also favors those looking for short-term financing since the payment terms are shorter.
That said, here are the advantages of hard money loans:
- Quick approval means faster closing of your real estate deals.
- There’s no personal liability involved since you are using the property as collateral.
- You can use it as a bridge loan to secure a long-term loan mortgage.
As far as the disadvantages are concerned, high interest rates are the major cause for concern. Here are the other cons you should be aware of.
- Short repayment terms of not more than three years
- Any default means you have lost your property.
- You should have other money to complete the renovation before the lender estimates the value of the property.
If you really need quick and flexible money to close your deal, hard money is a more reliable option. But that doesn’t mean all lenders are the same. So getting the best deals often depends on who you choose to partner with.
Choosing a Private Money Lender
When evaluating the private lenders in the market, there are certain factors to prioritize. First, you want to work with highly reputed lenders. Often, these lenders will have friendlier rates and fees. They will also have a vast clientele, so they have a better understanding of the market.
Reputation is another factor to consider when looking for a private money lender. A rule of thumb is to find a couple of lenders in your area before researching their services. You also want to know their average approval time and the type of rental properties they accept. For instance, some lenders only deal in single and multi-family properties. Others accept commercial and industrial properties as well as prime land.
The quality of customer support and the availability of other support services are also critical. The best lender will have high-end client support and advice on what to do and what not to do.
Get Started With Hard Money Loans Today
Hard money loans exist for a reason, and you always want to use them to your advantage. As a real estate investor, you want to consider your options carefully. Sticking to this guide will help you choose the right lender and know if a hard money loan is right for you. That said, always be on the lookout for good deals, and don’t be afraid to maximize hard money loans.