Have you ever watched a house-flipping show and dreamed of doing that yourself? Maybe there are some foreclosures or rundown houses in your neighborhood that you’d love to get your hands on, if only you had the money to get started.
When you need money fast to move on a property, a traditional mortgage isn’t necessarily an option. Instead, you may want to consider a hard money loan, so you don’t miss out on the real estate opportunity.
What is a Hard Money Loan?
Hard money loans are usually used for real estate transactions and rely on existing property holdings as collateral. They give you quick access to money from private investors instead of banks or corporations.
When Should You Consider a Hard Money Loan?
Relying on hard money loans can be a risky venture for some people. However, they can be useful in certain situations.
- House flipping is a great reason to choose a hard money loan. Investors can see huge profits, so they are more apt to seal the deal. If you can renovate a property and sell it quickly, both parties can benefit.
- Overcome bad credit to purchase a property. Hard money lenders don’t have to wait out a set period after somebody filed bankruptcy or experienced foreclosure.
- Vying against other cash offers can be problematic if you want to purchase a foreclosure or auction property. A hard money loan can give you the money to compete in those situations.
- Short-term fixes for people seeking to buy a new house while waiting for another one to sell. Some lenders even get creative and finance more than one property.
Fast cash is tempting and can bail people out of tough situations. Make sure you are comfortable with the benefits and risks of a hard money loan before taking one on yourself.
Benefits of Hard Money Loans
Hard money loans wouldn’t exist if there weren’t some benefits to using them. There are a few big reasons to consider hard money loans.
- The property you’re purchasing is your collateral, so investors focus on the value of the real estate.
- There are no low income or credit minimums. While you may need to provide your income and credit information, many lenders will negotiate the terms.
- Hard money lenders don’t care where you get the down payment from as long as you can deliver.
- Get cash fast. Since they ignore aspects of the usual loan or mortgage application process, you get the money sooner.
The Downside of Hard Money Loans
Hard money loans mean quick access to money, but they’re considered the last resort for a good reason. If you’re not prepared to repay the loan, you could end up losing your property.
- You need a large down payment, at least 30%, to attract an investor.
- Expect higher closing costs because your investor wants to cover some necessary expenses.
- Prepare for interest guarantees and prepayment penalties.
- The appraisal process is more complicated because you need two appraisals from two different sources.
How to Find Hard Money Lenders
Since real estate is a hot commodity, it’s easier than you think to find hard money lenders. Some money lenders may work with traditional loan officers to help people who can’t secure a conventional loan.
If you’re considering a hard money loan, speak with real estate agents, local mortgage officers, and local loan officers. There’s a good chance that they can put you in touch with the right people.
Tips for Finding the Right Hard Money Lender
Money is on the line, and you’re investing a lot in this venture, so you want to work with the right lender. While there’s a degree of risk involved, no matter who you borrow from, it’s in your best interest to take steps to mitigate that risk.
- Choose a money lender with real estate experience.
- Buy local. Using a local lender means you’re dealing with somebody who knows the area and may open the door to more connections.
- Mind your time, especially regarding how fast they can process the loan and when payment is due. Establish the expected timeline to prevent surprises down the road.
- Read the fine print. Know your contract thoroughly before signing on the dotted line, especially regarding fees.
The Bottom Line on Hard Money Loans
Every financial commitment is a huge undertaking. Hard money loans involve large amounts of money from private money lenders and short repayment periods, but they are valuable options in the real estate industry.
If you’re prepared to handle the worst-case scenario or can definitely repay the loan on time, it may be worthwhile. Make sure you understand what you’re getting into and remember that you can decline a hard money loan that sounds shady.