For real estate investing, a hard money loan or private loan is a unique kind of mortgage loan. The traditional lender like the bank doesn’t offer hard money mortgages.
But, private money lenders & individuals serve as the hard money loan lenders, providing hard money loans to the investors.
Who can use hard money loans & why?
The hard money loans are used by the real estate investors that need the short-term funding of the investment deal. The good deals will go fast & cash is king. Suppose you do not have much access to cash to fund a deal, your offer of buying a property will not be competitive.
How do these loans work?
Just like traditional loans, hard money loans have got the underwriting process. But, this underwriting process is much faster. As the lender is highly interested in the property value than the finances, it does not take very long to approve the loan. Many loans can be approved in some days.
When you get pre-approved & have submitted the right information on a property you would like to purchase, hard money lender, can order the appraisal.
If a property meets the lender’s criteria & you have insurance and documentation on a property, it can move to close & you can get this money to buy a property.
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Hard money loans can be used for short-term purposes:
To bridge a gap between the investment property purchase & longer-term financing. To buy-and-hold, the rental property investors use the hard money for getting and renovating the property and refinance debt with the traditional lender for paying off the lender.
To finance the fix-and-flip property deals where a goal is to get the money back as well as repay this loan.
The hard money loans are a go-to for the house flippers who cannot borrow money from the bank. This can be that the credit is not great or because this deal does not pass the traditional lender’s guidelines.
Borrower’s cost for hard money — interest rate and loan origination fee – will be higher for such reasons. Rates will be higher to compensate a lender for an increased risk of the deal.
Why use a hard money loan?
Let us look at some instances when the hard money loan will be an amazing alternative to the traditional financing choices.
- Your credit score isn’t high enough or your income history does not meet bank and other traditional lender needs.
- You have the property investment deal and do not have enough time to check through the lengthy & cumbersome bank loan procedure.
- You wish to fix-n-flip the properties and need to be guaranteed quick access for financing. Not like the traditional loan lenders, the hard money lenders can work with you and find the top-matched loan deal for the project and can offer many more benefits when you do many deals with them.
- You do not have enough capital to cover rehab costs of a property you wish to flip.
- You do not have enough cash and access to private financing from friends and family.
Are these loans a good idea?
With a lot of funding choices for the investment deals, are these loans a great idea?
An answer has so much to do with hard money loan lenders that you are considering. You need to look for such things in the lender:
- Reasonable interest rates & fees. The hard money loan, lenders are not subject to strict needs that the traditional financial organization is held to, thus conduct the due diligence. You can compare the rates of interest & loan fees to make sure you get the competitive terms.
- Extensive experience with the type of loan you are seeking.
- Good reputation. You can check the reviews online. Ask investors for the recommendations and in case there are any lenders you must avoid.
- Enough funding for the loan. There are stories of loan lenders who did not have promised cash accessible for the scheduled draw. It is one big problem since finishing on time becomes important for many investors.
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Whenever you apply for the hard money loans, you’re working with a person rather than the institution. Having a personal relationship with your lender is very important that is one reason why hard money will be an attractive choice.