Hard Money Loans are asset-based loans with real estate properties as collateral. Real Estate Investors who flip houses, buy real estate rentals, and invest in commercial properties favor these loans because they benefit from the fast process. What are Hard Money Loans known for is that they are conveniently released faster than traditional loans. Thus, they are the go-to loans for investors who need fast funds for a deal and those with unfavorable credit reports.
A real estate investor can obtain Hard Money Loans from individual private money lenders, lending companies, or mortgage companies that are usually community-based. However, many Hard Money Lending companies have expanded their operations to more than two states, and some have expanded nationally.
Hard Money Loans usually have higher interest or loan rates than traditional lenders because your credit history and financials are secondary to your collateral. This position enables them to make decisions faster and requires fewer documents, but it also makes hard money lenders absorb more risks than traditional lenders.
When is a Hard Money Loan a Good Choice?
In real estate investments, what are hard money loans best depends on the purpose of your financial needs or situations. Here are some conditions where obtaining a hard money loan is your best choice:
- You need fresh funds for your business to tide it over a slow season, or there is an opportunity to expand. Also, a quick loan release can save your business a lot if you pay your suppliers immediately, for instance.
- You are in the House Flipping Industry and have a deal you can’t let go of. Hard Money Loans are handy in these situations because they close quickly, often not exceeding 15 days.
- You’re into Real Estate Investments, buying rundown properties that have the potential as long-term investments as rentals. You can use hard money loans to settle with the seller fast and start the property rehabilitation process in no time.
- The property you want to invest in is not acceptable as collateral by traditional banks or lenders. This situation is where Hard Money Lenders successfully step in because they will be more likely interested in the After Repair Value of your property.
- You can utilize the equity portion of your investment properties to consolidate all your debt payments. Debt consolidation focuses your amortizations on only one loan, thus eliminating all the stress from monitoring all of your debt obligations.
How Hard Money Loans Work
Hard Money Loans differ from traditional loans in many aspects. What are Hard Money Loans good in are in the way they are processed. Hard money loans, being secured by assets such as real estate properties, differ from traditional loans in how they work.
- They can release funds in as fast as one week to 15 days because hard money lenders do not have to wait for various financial documents, which can sometimes be difficult to gather or accomplish. Loan evaluation focuses more on the viability of your plan for the property and the property itself.
- The Loan-to-Value Ratio limit of Hard Money Lenders is much lower than that of traditional banks. A Hard Money Loan has a maximum LTV of 70%.
- Hard Money Lenders need to recover their funds faster because they offer quick asset-based evaluations. Thus, the typical hard money loan has a term that ranges from only six months to 36 months.
- In exchange for a fast loan release, hard money lenders also charge loan rates that are between 9.9% to 15% per annum, depending on the deal and the property. Some may also charge origination and closing fees between 2.5 to 5 points. One point is equivalent to 1% of the loan amount.
- Hard Money Lenders take more risks than traditional lenders. Your credit history and financials are secondary to the value of the property or asset you have as collateral. This exposes them to risks higher than what traditional banks are willing to take. Thus, they recover their investments with higher rates, equity requirements, and shorter terms.
Advantages of Getting a Hard Money Loan
Here are some advantages you can consider when you need hard money funds for your real estate investments.
- Fast Release of Funds. Hard Money Lenders can release loans within 15 days from your date of application. Sometimes, they can also give releases within a week, especially when you have an excellent repayment record with your lender.
- Hard Money Loans are asset-based loans. Your Credit History or Financial Standing is not a primary factor in loan evaluation because Hard Money Lenders focus on the property you present as collateral. You do not have to submit financial documents other than the most basic requirements.
- One of the reasons traditional banks or lenders need time to finalize a decision is that they need to conform to their respective national lending policies, which hinders fast decision-making processes. Hard Money Lenders on the other hand, can make quick decisions because they do not need to conform to traditional bank policies.
- Most Hard Money Lenders are locally based. They know the local market and real estate industry well. A local lender’s expertise can often lead to better loan packages for real estate investors. A long business relationship and a good repayment record with your lender can give you financing perks not offered to other clientele.
Disadvantages of a Hard Money Loan
The advantages Hard Money Lenders offer to real estate investors, beginners or otherwise, also present some disadvantages. Listed below are some examples common to Hard Money Loans.
- Hard Money Loans only offer loans with lower LTV ratios. Traditional banks only require a 5% downpayment, while Hard Money Lenders require at least 30% equity.
- A typical Hard Money Loan carries more risks for the lender, and they have to balance the risks they take with higher interest rates.
- Lenders only grant short-term loans of up to 36 months in order to recover their money quickly.
- Hard Money Loans are only available for non-owner occupied properties. They only accommodate investment properties.
Why You Need One
Stumbling blocks like poor credit, unacceptable collateral, or lack of experience sometimes prevent you from pursuing an investment deal you believe will uplift your living conditions. Traditional lenders mostly avoid these instances because your loan can negatively impact the quality of their portfolio, and this is where Hard Money Loans shine as alternatives to the traditional.
With an urgent real estate deal on your hand, the advantages you will get from a hard money loan will outweigh their disadvantages. If you want to know what are hard money loans and why they are the best for your real estate deal, call us at (832)-770-9415 or email us at info@gllholdings.com. You can also accomplish our pre-qualification form online through this link.
