What is a real estate Hard Money loan?

Hard money continues to be an important means of financing real estate deals. Hard money loans are essential for helping real estate investors find funding quickly. If you are a real estate investor, hard money loans could be your best friend, allowing you a quick path to secure deals.

But before you get a hard money loan, you should weigh the pros and cons of such a strategy to make sure it is the right one for you.

What is hard money?

Hard money loans are short term loans obtained from private investors and individuals, unlike a traditional loan that involves the local bank. Hard money loans are often obtained by investors whose goal is to renovate a property, and sell it. House flippers and real estate developers usually get a loan in a matter of days as opposed to waiting weeks for banks. One option for example, is finding a property that only needs some quick fixes to raise its value, then secure another loan based on the new value to pay off the hard money.

Another major difference between hard money lending versus other types of financing, is that the lender does not focus on your credit history or income. Hard money lenders also do not invest in owner occupied residences due to their regulations which increases their risks. Hard money lenders do not sell loans to Freddie Mac or Fannie Mae, instead they typically raise money from their own pool of investors. Lastly, unlike a traditional home loan that can range from 15 to 30 years payback term, hard money loans usually need to be paid back between 6-18 months.

What are the pros and cons?

Traditional financing takes months to complete. Depending on negotiations, hard money loans are generally funded within days. Since lenders are private, terms can be much more flexible than a bank loan. There is also no need to provide additional collateral as the property itself is the collateral. In addition to the flexibility, hard money loans give a real estate investor a competitive edge: the ability to put cash on the table in a timely manner to secure the deal.

There are, however, some disadvantages to using a hard money lender. Some lenders might charge high origination fees and the interest rates are typically around 11-15 percent, so there is a cost to the convenience but not too worry with LTV Lend we don’t over charge you. Also, the short term nature of the payback term, means that you have a short amount of time to list the house on the market if construction takes longer than estimated this may be an issue.

When to use hard money?

Though hard money lenders typically issue loans for almost any type of property, there are certain types of property investments which are absolutely made for hard money. Rehab projects, construction loans, and land loans were made to be financed through hard money.

This doesn’t mean that other types of real estate investments should not be financed through hard money. If you, as the buyer of a property, has credit issues, don’t have bank statements or income taxes to prove income, or you need to act quickly on a deal before it disappears, the speed and convenience offered by a hard money loan is worth its weight in gold.


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