What You Should Know About Hard Money Loans
When obtaining financing for a real estate project, many investors turn to hard money lenders for their quick and flexible funding options. But what exactly is a hard money loan, and how does it differ from traditional bank financing? This article dives into what you need to know about hard money lenders and loans:
What Is a Hard Money Loan?
In a nutshell, a hard money loan is a type of asset-based financing that is often used for real estate investments. Unlike traditional bank loans, which are usually based on the borrower's creditworthiness and financial history, hard money loans are actually secured by the value of the purchased property. This means the lender is primarily concerned with the property's potential for generating income rather than the borrower's ability to repay the loan.
Hard money loans are typically short-term, with terms ranging from six months to three years. They are designed for real estate investments with a high potential for returns, such as fix-and-flip projects or rental properties.
How Do Hard Money Loans Work?
When one applies for a hard money loan, the lender will evaluate the property used as collateral to determine its current value and potential for generating income. Based on this evaluation, the lender will determine the loan-to-value (LTV) ratio, the percentage of the property's value that the lender is willing to lend.
Most hard money lenders will lend up to 70-80% of the property's value, although some may be willing to lend up to 90%. The borrower will then be required to put down a certain percentage of the purchase price as a down payment, ranging from 10-30%.
Once the loan is approved, the borrower will receive the funds within days rather than the weeks or months it can take to secure traditional bank financing. The loan will typically have a higher interest rate than a traditional bank loan, ranging from 8-15% or higher, as well as additional fees and points.
Who Uses Hard Money Loans?
Hard money loans are typically used by real estate investors looking for quick and flexible financing options for their projects. These investors may be looking to purchase a distressed property, renovate and sell it for a profit, or purchase a rental property to generate income.
Because hard money lenders are primarily concerned with the potential for income generation from the property, they are typically more willing to lend to borrowers with less-than-perfect credit or limited financial history. This makes hard money loans a popular option for new investors or those who traditional banks have turned down.
Pros and Cons of Hard Money Loans
Here are a few of the advantages and disadvantages to consider before applying for a hard money loan:
Pros:
Quick funding: Hard money loans can be funded within days, making them a good option for investors who need to act quickly on a property.
Flexible terms: Because hard money lenders are not subject to the same regulations as banks, they can offer more flexible lending terms and customized repayment schedules.
Asset-based lending: Hard money lenders are primarily concerned with the property's value being used as collateral rather than the borrower's creditworthiness or financial history. This makes hard money loans a good option for borrowers who don't qualify for traditional bank financing.
Cons:
High-interest rates: Hard money loans typically have higher interest rates than traditional bank loans, making them more expensive in the long run.
Short-term loans: Hard money loans are meant to be short-term financing options, typically lasting no more than three years. This means that borrowers will need to have a solid exit strategy in place to repay the loan.
Additional fees and points: Hard money lenders may charge additional fees and points on top of the interest rate, which can add up quickly.
Conclusion
Hard money loans can be a very valuable tool for real estate investors looking for quick and flexible financing options for their projects. However, it's essential to understand the pros and cons of this financing type before applying for a loan. By researching and working with a reputable lender, you can decide whether or not a hard money loan is the right choice for your investment strategy.
Jaken Finance Group provides financial solutions that conventional lenders might not entertain. New and experienced investors are attracted to our services, as we can discover methods to ensure the success of your transaction. Ask us about our hard money loan solutions!