What is a hard money loan? That may be your first question. In short, a hard money load is secured by real property and backed by individuals/investors, not banks. These are generally used for short-term real estate loans since they are based on the value of real property being used as collateral. The costs for these loans can vary and are negotiated between the lender and the borrower directly. But enough of the technical stuff. What you really want to know is could this be your key to your future in real estate investing.
Let’s begin with the pros of utilizing a hard money loan over a conventional bank loan.
Convenience – With a hard money loan, since you are working with lenders directly, you can expedite the loan terms in a matter of weeks as opposed to the months it can take to secure a conventional loan. Once there is an established relationship with the lender/investor, you can avoid the pain staking process of contracts being reviewed with a fine tooth comb. This allows lenders to move into these deals quicker and avoid missing great property opportunities.
Flexibility – Since these loans are not conventional loans, the underwriting process is not standardized. This leaves the ability to negotiate your agreement based on your specific circumstances. These lenders are far more likely to speak with you directly to come up with terms that work for you than a large corporate bank.
Approval – Since collateral is at the top of the importance list for lenders, these loans tend to have a higher approval rate. Lenders look at what the property is worth as opposed to your credit report. Negative factors on your credit are of far less importance that the value of the property. This increases the chances of securing the loan for the home.
Now you knew the disadvantages were coming. Here are some things to consider before taking the steps to secure a hard money loan.
Shorter Repayment Time – The nature of these loans is to assist sellers into getting properties on the market as soon as possible. That is why speed plays a huge part in the popularity of these loans. Created as short-term loans to raise funds quickly, to increase the profitability of the property.
Cost – Naturally with convenience and speed comes a cost. Those looking to take advantage of these types of loans can end up paying between 7.5%-15% which can be over 10 percentage points above a conventional loan. Along with a high interest rate, you may also find that your closing costs and other fees are likely to cost more as well.
What is the right situation to use a hard money loan? If you are looking for a short-term loan to facilitate a home flip or emergency home repairs to allow you to sell before a foreclosure. If keeping the home, this would allow for urgent repairs with a refinance shortly there after with a conventional institution. The key take away, do your research and pay close attention to selling trends in your area and learn the strategies needed to make the right moves for your investment.