UPDATED 2/22/21
Anyone who has ever bought a house as an investment property knows that you have to jump through about one million hoops in order to secure the funding to buy it. If you are planning to buy a house that you’re going to live in for 30 years, it’s worth all the hassle.
However, if you are a real estate investor, and need to be able to move money fast in order to get a great purchase that isn’t going to wait around for you, the dragged-out and tedious mortgage lending process might ruin your deal. This is where hard money loans come in to play. Some real estate borrowers choose hard money loans because it offers a process for securing funding outside of the traditional bank lending process. This involves far less documentation and results in getting the money a lot faster. Often, you can also secure hard money loans in situations when a conventional real estate lender would not offer you money.
If hard money loans is a new concept to you, we have put together a list of commonly asked questions that people have about them.
What are the greatest differences between hard money lenders and traditional mortgage lenders?
As we mentioned, securing a hard money loan is often easier, with fewer requirements, and faster than traditional mortgage loans. Hard money loans are sometimes called “secure loans” or “asset-based loans” because they are focused on the value of the collateral being purchased with the money, whereas conventional mortgage lending requirements are based on the the borrower’s credit score, income levels, and cash flow, as well as the value of the property being purchased. Mortgage lenders focus on the borrower’s ability to repay their loans, whereas a hard money lender uses the resale of the property to recover their investment if the borrower does not fulfill the terms of the loan, making the investment less of a risk.
What are the pros and cons of using hard money lenders for real estate funding?
You may have better luck securing funding from a hard money lender faster, if your real estate deal is time sensitive. It is also easier to get funding from a hard money lender if you don’t have great credit.
On the other hand, hard money loan rates may be higher than that of traditional real estate funding. Using the traditional route might be more advantageous to you if you have good credit, have the time to go through the long process, and want to slowly repay the loan back over a span of 30 years.
What type of real estate investments will hard money lenders provide funding for?
Most private hard money lenders offer funding for any sort of real estate investment, whether it is commercial or residential, or even undeveloped land. The only type of real estate purchase that hard money lenders typically did not work with is buyers who are looking to buy a home that they are going to live in themselves. This is because there are a lot of federal regulation around owner-occupied real estate lending, which does not accommodate the hard money lending process. Hard money lenders can offer funding for private vacation homes though, as long as the burrowing isn’t going to live in the residence year-round.
How does one get a hard money loan?
Since a hard money loan involves large sums of money, it is advantageous to carefully select the hard money lender that you borrow from. This can be done by researching the reputation of hard money lenders who fund the specific type of lending needed.
After selecting a hard money lending company to work with, the borrower needs to contact them and discuss the details of their project in order to be considered for a loan. This includes:
- The dates in which the money would be needed for the transaction.
- The location and value of the property.
- Any renovations that will need to be funded and impact that value of the property.
- Whether the loan is for a new purchase or a refinance.
Securing funding to purchase an investment property has often difficult and stressful. If you don’t have great credit or need the money quicker than a traditional bank will offer, using a hard money loan might be the best option for you.
The path to homeownership can be very difficult, especially if you made money mistakes and are still re-building your credit. You may not qualify for a mortgage with a traditional lender but hard money loans may be an option for you to investigate. Many hard money lenders can help you repair your credit and hard money fees can be less than lender fees with a traditional mortgage company. You can look at hard money deals to find out what kinds of options are available to you.
If you are already a homeowner and looking to do repairs, then you may also need a hard money lender. If you are not eligible for a traditional home equity line of credit, you may qualify for a hard money home equity loan. In this situation, you may be worried about lender fees but most hard money lender fees can be recovered when you finish the renovations and sell your property. This loan can help if you are doing necessary upgrade prior to selling your home or if you are seeking to do repairs but your homeowners insurance won’t cover the complete cost of the repairs.