Hard money loans are funds secured using a property as collateral with limited or no reliance upon the borrower's creditworthiness. Banks do not offer hard money loans, and they are primarily used to facilitate real estate purchases. Like fix and flip loans, hard money loans are typically offered by private real estate companies or individual lenders. These loans can last anywhere between one and three years and are among the fastest ways to acquire urgent money.
Since hard money loans can be issued quickly, they are often an appealing choice for homeowners that face the risk of foreclosure or business borrowers who intend to flip houses or purchase an investment property. One of the major differences between a hard money loan and other loans like traditional mortgages is that the lender is relying primarily upon the collateral value and not the borrower’s ability to repay. This offers borrowers with a poor credit history a chance to invest in real estate as their financial background is not reviewed when qualifying them for the loan.
How does a hard money loan work?
Hard money loans are largely hinged on the value of the property you are offering as collateral. Compared to the traditional creditors like banks and credit unions, hard money lenders see value in your property and decide whether to offer a loan and how much they should offer.
Often sought after by property flippers looking to purchase a property, renovate it and resell it, hard money loans offer convenience and the opportunity to take advantage of emerging real estate opportunities. Most hard money lenders will need to know the value of your investment property by sending property valuators to inspect its condition. Many people have used hard money loans as an investment and a business model to gain traction in the real estate industry.
While hard money loans are a solid investment option, they carry significant risk with them. Hard money lenders are not governed by the same institutional regulations that banks and credit unions are. Hard money loan lenders have the freedom to determine the value they accord to your property, the interest a loan accrues and the period of repayment.
What are the main uses of hard money loans?
Since their use is limited to the real estate industry, hard money loans are mostly used to purchase property with the intent to resell it. Here are some ways hard money loans are used in the real estate industry.
Purchasing commercial property
You may experience difficulties in accessing a loan to fund the purchase of a unique property in conventional financing institutions. A hard money loan could come in handy as it doesn’t consider as many factors as traditional lenders typically do. The loan may be significantly larger, offering the opportunity to invest in valuable commercial and rental property and make a better profit.
Fix-and-flip investors purchase outdated or poorly maintained property to renovate it and resell it. While it is a lucrative real estate venture, most conventional financing institutions cannot offer the loans in the time and amount required to make the purchase, renovate it and place it back into the market. Hard money loans offer the perfect opportunity for such investors, even providing extra funds to take care of the renovations and pay for the necessary fees. Even with higher interest rates by most hard money lenders, investors prefer fast and convenient forms of financing.
Purchasing investment property
Hard money lending companies and individuals also provide a solid option for real estate investors to pay for their investments. Individuals that have difficulty getting approved by traditional loan institutions or need more money than is being offered by such institutions should consider getting a hard money loan.
What are the pros and cons of hard money loans?
Some upsides of using hard money loans include:
- Much faster approval processes.
- Credit history is often not a factor in determining approval and loan amount.
- More flexible than conventional financing institutions.
Some drawbacks associated with hard money loans include:
- Higher interest rates than traditional loans.
- A shorter repayment period might be inconvenient in real estate.
- Proof of previous successful house flips may be required.
The fact remains that hard money loans remain a convenient tool for those seeking funds. These loans often feature high-interest rates and higher risk if your investment does not pay off in time. Investors looking to access hard money loans should be confident about the probability of their investment being successful within the agreed period.