To those who haven't yet learned about hard money loans, they can seem confusing and a bit mysterious. Many real estate investors use hard money loans as the backbone of their operation as they provide ample, quick capital for purchasing property, repairs, construction, flips and everything else in-between.
Imagine if bank loans were offered to just anyone? We would be getting money anytime we please. But this is impractical.
That's why we have people who qualify for a mortgage while others have to save almost for a lifetime to acquire property. Nonetheless, if you understand how hard money loans work, you don't need to wait too long to buy a house. Such loans are perfect examples of outside-the-box financing options.
But before you strike a deal with a hard money lender, ask yourself, "Is a hard money loan right for me?" If yes, what are the best alternatives? Read this post to the end for a comprehensive understanding of how hard money lending works.
Who is it meant for?
First, know that hard money loans are short-term debts which must be secured by real estate property or other asset. In almost all cases, the property or asset being used as collateral against the loan must have a current market value of at least the loan amount, though, it often should exceed the loan amount quite significantly. The greater this difference, also know as the loan-to-value ratio, the easier it is to qualify for a hard money loan. Please note that hard money is never funded by banks. Only private investors can provide these loans and the practice is absolutely legal.
The borrower receives hard cash based on their property value. So, your credit score usually doesn't count when you need a hard cash loan. Your loan amount will be calculated by the LTV (loan to value) i.e. loan amount divided by property value.
Quick access is probably the greatest benefit of borrowing hard cash. However, there are certain terms you must qualify for. Plus, you have to complete the underwriting procedure. These loans are mainly meant for individuals who either cannot qualify for traditional financing, such as a mortgage, or who need access to capital quickly. Hard money loans can often be issued in a matter of days, rather than the months it usually takes to secure a mortgage. This speed and flexibility also makes these loans ideal for investors looking to flip property or acquire rental units.
What do you need to acquire a hard money loan?
Important to note is that the requirements of hard money loans differ from one lender to the other but they often share a common set of prerequisites. The value of the property or asset being put up as collateral is the main concern. It's important to make sure it's not under lien and that the current value of it exceeds the loan amount you are requesting. This is critical for lenders because it limits their risk in the event that you cannot pay back the debt.
Other things that lenders take in to considering is the type of property (condo, single family, multi-family, commercial, etc), your credit score, your experience in property investment, the loan term, and the reason for the loan (purchase, refinance, bridge, etc).
Ultimately, your loan terms are subject to your unique needs and the hard money lender you choose. Keep in mind that a hard money lender prefers to work locally. It's therefore advisable to look for a hard money lender near you rather than from a different state.
When is hard money a better alternative to traditional loans?
There are a number of instances when it makes more sense to use a hard money loan instead of a regular mortgage or bank loan:
- If our family and friends refuse or are unable to give you private financing
- There's a hot real estate deal which you might miss if you don't act promptly
- You hate the intricate loan process that happens in the banks
- You want a fix and flip deal and a guarantee of quick finance
- You have insufficient capital to clear rehab expenses for the house you want to flip
- You have a bad credit score and history
What are the steps involved in getting a hard money loan?
- Determine the property you want to buy or refinance. Make sure you have a complete understanding of all of the numbers and financials involved in the deal.
- Submit a quick loan request to find a hard money lender willing to finance your deal.
- Once a lender is chosen and terms are agreed upon, the hard money lender orders a property appraisal.
- If your collateral property or asset meets the lending criteria including insurance, the deal moves to closing.
- You'll receive the hard money loan to buy the property or the the funds for the refinance