Many investors look for financing options when planning to purchase a property, which has created diversity in the real estate lending industry. However, finding the right loan for your real estate project can be a big challenge, particularly with so many types to choose from. There are many different types of real estate funding out there, all with their own unique benefits, disadvantages, and purposes.
The bank loan or traditional mortgage may be the most commonly known, but this may not be a viable option for every borrower or suited to every kind of real estate project. Hard money loans are an alternative option, but how do you know if they are the right choice for you?
We are covering all the basics of hard money loans in this article. Is a hard money loan a good idea?
Why Use A Hard Money Loan?
Hard money loans are short-term loans backed by the value of the real estate asset itself. These types of loans are primarily used by investors looking to acquire a property, renovate it and resell it in a short timeframe, but does have other applications (such as construction). The terms of hard money loans are based on the value of the property that is being financed.
The funds used by hard money lenders can be sourced from individual investors, hedge funds, or raised from other financial sources. There are many significant benefits that can come with using a hard money loan for your next real estate project.
The Benefits Of Hard Money Loans
The amount of time that usually goes into the loan application, underwriting, and approval process can be detrimental to investors looking to close on a property quickly. The most significant benefit of a hard money loan is that by putting together loan funds from private, non-bank sources, hard money lenders can offer more speed when granting loans. Borrowers can receive their funding within only a few days with hard money loans, versus several weeks with other financial institutions.
Another benefit is that hard money lenders put less stake in the borrower’s financial history, and more in the value of the asset being borrowed against. That means that if you have less-than-stellar credit, you can still get approved for a hard money loan. Since the funds are sourced from private investors, the terms of the deal can be more flexible.
The Disadvantages Of Hard Money Loans
Even with such distinct benefits, there are also disadvantages to consider. The first disadvantage is that hard money loans can be more expensive than traditional mortgages, due to the level of risk involved for the lender and this is reflected in their rates.
The average hard money industry examples show that interest rates can range from 9-13% with terms lasting anywhere between 3 months to 2 years. Many hard money lenders require some portion of money down from the investor prior to granting the rest of the funds. The risk isn’t only higher for the lender, it’s higher for the borrower too. If you aren’t able to pay back the loan on time it will have negative consequences.
Lastly, these loans are also not suitable for the purchase of primary residences – if this is your goal then a hard money loan is not the right avenue for you to go down.
Choosing A Hard Money Lender
If you’ve decided to look for a hard money loan to finance your next real estate project, there are several things you should keep in mind before choosing a lender. The first step is to go with a local hard money lender, as this will speed up the property inspection and assessment process significantly. Local hard money lenders can also offer better rates than national options.
Next, you should compare rates and terms from multiple different lenders in order to find the best fit for your project. You’ll want to pay careful; attention to any legal agreements prior to signing and ensure you are clued up on the terms and conditions.
New Silver has multiple loan options available that you can get approved for in under 10 minutes and allows you to close within days.
Hard money loans are a good idea for the right project under the right circumstances. The investors behind these lenders put less stake in the borrower’s financial history and more into the value of the asset itself, giving less established investors a foot in the door when purchasing real estate. hard money loan applications are considered on a case-by-case basis by lenders, which allows more room for negotiation in terms such as repayment periods.
The most important step to choosing a hard money lender is knowing your project goals and making sure you have a detailed plan to help you achieve them.