Hard Money Loans Explained
Hard money loans are a quick solution for financing or refinancing a real estate investment. Especially if you don’t qualify for traditional financing or don’t have time to go through the many hoops at a bank or other traditional lender.
That being said, a lot of people are unsure of what a hard money loan actually is. Furthermore, they’re unsure of the scenario where they could use hard money in real estate. That’s why we’ve put this blog together – to explain what you need to know about this form of lending.
What is a hard money loan?
A hard money loan is usually a short-term loan used to purchase or refinance real estate. It’s primarily used for real estate investment acquisitions.
The loans are provided by private lenders, as opposed to traditional financial institutions such as banks or credit unions. Unlike these traditional players, hard money lenders are far less burdened by red tape and regulations, which makes accessing finance quicker and more straightforward.
The terms usually run for around 12 months. Although, the loan term can be extended from 2-5 years. The amount that a borrower can get using a hard money loan is of course based on the value of the property in question. The property may be one the borrower already owns or it may be the property the borrower is looking to purchase.
When is the right time to use this type of loan?
These loans can be extremely useful if you don’t have the equity to finance a real estate investment opportunity. They can also be a good alternative to traditional property loans, as acquiring finance through traditional routes takes time and there are a lot of different hurdles along the way. And, as any experienced real estate investor knows, speed is everything.
They also fall into a number of different categories, which are used for different purposes, such as:
Are hard money loans a good idea?
Hard money loans provide quick access to financing for real estate investment deals, in a market where speed is everything. However, they may come with slightly higher costs. Therefore, before you look into these loans, it’s worth assessing the pros and cons:
- Asset-based lending – the lender places the most weight on the property when determining if and how much to lend. The borrower’s ability to repay the loan does play a role, but the emphasis is placed on the asset, not the borrower.
- The speed – Hard money loans are fast. This limits the possibility of losing investment opportunities and gives you a head start on your possible fix and flip project.
- Payment may be interest-only – Hard money lenders often allow you to make interest-only payments throughout the repayment period, which can be very useful if you only plan to have the loan for a short period.
- Limited credit and income standards – If you have a poor credit rating then getting finance through traditional means can be tricky. However, these loans are asset-based, which makes it easier to get financing that may have been previously denied to you.
- May require a large down payment – This largely depends on your experience and the profitability of the investment you are buying. However, in some cases, you may need a slightly bigger down payment. That being said, if you’re using the property as a fix and flip investment, you should be able to pay that back easily on the profit you make.
- For investment properties only – Hard money lenders only make loans on investment properties, so they are not suitable for owner-occupied purchases.
Where can I get a hard money loan?
The first thing to remember is banks and credit unions do not offer these types of loans. If you want a hard money loan, you need to find private investors or a fund of investors, known as a hard money lender.
If you’re looking for a hard money loan on the East Coast, contact We Lend and speak to a member of our experienced and highly-qualified team.
Hard money loans: final thoughts
Hard money represents a great opportunity for real estate investors. If you need to act fast on your investment or have financial complications holding you back from accessing conventional types of financing, then having an experienced asset-based lender in your Rolodex can be a strategic advantage.
To ensure you make hard money work for you, you need a clear exit strategy and the right property. However, other than that, use them as the first stepping stone or another building block in your investment portfolio.