You hear the term ‘hard money loan’ and assume it’s a bad thing, right? These loans have a bad reputation, but they’re one of the best ways to finance investment real estate transactions.
If you’re buying a home to fix and flip or even buy and hold, you may not need traditional financing from a bank. By traditional, we mean 30-year loans from your local bank that take 30 – 45 days to process.
These are soft money loans – or traditional loans. Hard money loans are from private lenders or private investors – institutions or even people who invest in your investment. They have different terms, but they’re often great for investors.
What Is Hard Money?
Let’s look at hard money closely – what is it really?
Hard money loans look at you differently. They don’t focus on your credit score and income. That’s what soft money loans consider. Hard money loans look at the cold, hard facts.
How much is the property worth? What is the collateral? Lenders fall back this on should you default on the loan. Hard money lenders don’t focus on your ability to repay – they focus on the property itself. They only lend on properties they know they can take possession of and make their money back if you default.
The focus is on the property value, not your financial position. If you can’t pay, the hard money lender takes your home and sells it.
How Are Hard Money Loan Terms Different?
Hard money loan terms aren’t long-term. Soft money loans often have terms of 10 – 30 years. Most borrowers take the 30-year option because of the lower payment. They stretch the payments out, paying interest for a much longer period, and slowly earn equity in the home. The lower interest rate may sound enticing, but when you look at the total cost over the loan’s term, it’s a lot more than you realize.
Hard money loans have shorter terms. Usually one to five years, but you may find a slightly longer-term if you need it. The interest rates are higher because of the shorter term and higher risk, but you pay the loan off much faster.
Reasons To Use Hard Money
Hard money loans have higher interest rates and some people frown on them, so what reasons are there to use them?
Here are the most popular reasons.
- Fast approval – If you’ve applied for a loan at a traditional bank lately, you know how backed up they are. Loans may take 45+ days to close. When you’re buying a home, especially an investment property, time is of the essence. The longer you wait, the more money you lose.
Hard money loans close the loan fast – sometimes in as little as one week. You can get on with the renovations or finding a tenant much faster when you secure the financing fast.
- Flexible guidelines – Traditional mortgage loans have strict guidelines. You must meet the minimum credit score and maximum debt ratio guidelines. You must also make enough money, prove your stable employment, and show you have enough assets to cover your portion of the transaction.
Hard money loans have much more flexible guidelines. They customize the approach for each borrower. What they require for one borrower may be different for another because they focus on the collateral rather than the investor.
Yes, you still need to qualify with certain credit scores and debt ratios, but the entire process is more flexible for you.
- Larger loan amounts – Hard money loans have larger loan limits because there aren’t any government regulations limiting what they can offer. You can borrow from $100,000 to $3,000,000 sometimes.
- No experience necessary – Traditional banks look at investors as high risk. You aren’t going to live in the home, so the loan has a higher default risk. Many lenders require a couple of years’ experience investing in real estate before they’ll lend to you. It’s hard to get experience when no one will lend to you, right? Hard money lenders often don’t require experience and will still provide the higher loan amounts.
What To Look For In A Hard Money Loan
Not all hard money loans are created equal. Just like with traditional loans, shop around for the best options. Look closely at the terms, fine print, rate, and fees.
Before you choose a lender, look for:
- Experience – Is the lender well versed in investment loans? Do they have experience in the type of investing you’re doing – whether fix and flip or buy and hold?
- Transparency – No one likes unpleasant surprises at the closing table. Look for a lender that is transparent with their pricing, disclosing all fees upfront.
- Turnaround – Hard money lenders ‘should’ work faster than a traditional lender, but don’t assume all do. Find out a lender’s turnaround time and make sure it fits your needs.
- Good reviews – Nothing beats reviews of investors who have used a hard money lender before. Hearing their experience, good or bad, can help you decide if a lender is right for you.
Hard Money Is Great For Investors
If you’re thinking of investing in your first home or adding to your portfolio, hard money is the best way to get what you need.
You’ll get it faster than any other loan and be able to move forward with your investment plans. Whether you plan to fix and flip a property or buy and rent it, having the financing you need right away to move the project forward is the first big step.
Once you have the financing, you can buy the property, move forward with your plans, and see what else comes up to help you move forward with your diversified portfolio that now includes a lucrative real estate investment that may help you reach your financial goals much faster.