If you’re thinking about investing in property but can’t get a loan from a bank, you’re not alone. A lot of people who invest in real estate face this challenge, especially when they need cash quickly. A hard money loan is often the answer in these situations. It’s a different kind of financing that can help pay for deals that banks won’t touch.
That doesn’t imply it’s the best option for everyone. As you might expect, hard money lending has its benefits, and it also has its risks. Let’s break it all down so you can decide if it’s something you want to consider.
What is Hard Money Lending?
When you borrow money using this option, it involves using property as collateral. Hard money lenders don’t care as much about your credit score as banks do. They only care about how much the property you’re buying or fixing up is worth. Most of the time, these loans come from private lenders or investment groups, and not banks.
The loans are only for a short term, usually six months to a few years. A normal mortgage lasts 15 to 30 years; therefore, this is a lot shorter. They are most often used to buy properties that people plan to sell or rent out, not homes they plan to live in. This kind of loan can help you move quickly if you are flipping a house or undertaking a short remodel to rent it out.
When is it a Good Idea?
Hard money lending works best when time is short and deals are moving swiftly. For instance:
- Fix-and-flip projects where homes are bought, fixed, and sold quickly.
- Buying a property at auction, where full payment is expected immediately.
- Construction projects that need funding to get started.
- Land deals where it’s impossible to secure a regular mortgage.
In these cases, standard bank loans take too long or don’t suit the bill. On the other hand, hard money lenders can give you funding in just a few days. As a result, many investors end up taking these loans because they are quickly disbursed.
What Makes Hard Money Loans Different?
Hard money loans and regular loans are different in the following ways:
- Short loan terms: Usually between 6 months and 3 years.
- Interest rates are higher: Between 8% and 15%.
- Focus on the property: Not your income or credit history.
- Large down payments: Usually 20% to 30% of the property’s value.
The lender cares more about how much the home or land is worth than your past finances. That’s why people with bad credit can sometimes still get this loan. Although a bad credit score might not stop you from getting a hard money loan, it is not good for your financial health. Therefore, we recommend you read this article to learn how to improve your credit score.
What are the Benefits?
There are some clear benefits to getting this credit:
- Fast approvals: Loans are approved and paid out quickly.
- Less paperwork: Lenders don’t need as many documents as banks do.
- Flexible Terms: Some lenders may work with you to make a repayment plan that works for your project.
- Great for investors: Especially those who buy and sell properties or work on short-term projects.
- No penalty for paying early: You can often pay off the loan early without having to pay any extra fees.
This type of loan can be the difference between getting a deal and not getting one. It can help you stay ahead of the game if you’re an investor in a hurry.
What are the Disadvantages?
There are some real risks you need to understand:
- High costs: The interest rates and costs are a lot higher than they are for regular loans.
- Short timeline: You have to pay back the loan quickly.
- You could lose your property: If you don’t pay, the lender can take it.
- Not for everyone: Long-term investors may find these loans excessively expensive.
You need to know exactly how you’ll pay back the money before you borrow it. You could be in trouble if your project is delayed or doesn’t sell. Some loans may let you extend the time you have to pay them back, but this comes with extra fees. But bear in mind that those fees can eat into your profits if you’re not careful.
What Do Hard Money Loans Cost?
The cost of a hard money loan includes:
- Interest rates: Most of the time, they are between 8% and 15%.
- Points: These are fees that you pay up front, usually between 2% and 4% of the loan.
- Closing costs: These are similar to those of traditional loans and range from 1% to 5%.
Many lenders only require interest payments at first. But at the end of the loan term, you might have to pay the full amount all at once; this is known as a balloon payment. You can visit https://investinganswers.com/ to learn more about a balloon payment.
Be sure you understand the terms before signing anything. If you’re unsure, it may help to talk with a real estate advisor or experienced investor.
Who are the Lenders?
Hard money lenders are usually:
- Private individuals
- Real estate investors
- Small finance companies
You won’t find these loans at your local bank, but they are often posted online or shared through local real estate groups. You can also get referrals from real estate agents or mortgage brokers. However, exercise caution, not all lenders are honest. Therefore, always read reviews, ask for references, and compare offers.
Conclusion
Hard money lending can be a useful tool for the right kind of project. It’s quick and flexible, and it can help you close deals that banks would say no to. However, not everyone should go for it because of its higher costs and shorter terms.
