How do hard money loans work?
When does a hard money loan make sense?
In the real estate arena investors keen to quickly snatch up property will often rely on hard money loans. These are usually shorter-term financing options provided by private companies or private lenders. These loans are backed by the value of the property that is either being purchased or is currently owned as opposed to the buyer’s individual credit score and tax returns.
Since it’s no secret that Investors generally write off every expense they can (within the confines of the IRS guidelines) this greatly reduces the investor’s income— on paper which in turn makes getting a traditional loan much more difficult if not impossible. Thus, hard money loans serve a critical function when mainstream conventional loans are unattainable.
How do hard money loans differ from No Doc Investment Loans?
While hard money loans, bridge loans, and no doc investment real estate loans can serve similar purposes in real estate financing, they are in fact a little different.
Bridge loans are also short-term loans that cover the gap in time between a property purchase and the sale of an existing property. In this case the bridge loan would be attached to the value of the existing property. In this case, the bridge loan may have a lower interest rate when compared to a hard money loan.
No Doc Investment Real Estate Loans: As per the name, these loans are NOT underwritten on the borrowers’ financial records, although the credit score can play a factor. These loans prove to be very helpful for investors who are growing their real estate holdings. Hard money lenders tend to exclusively look at the borrowers’ property value and assets without scrutinizing credit scores.
Other uses that may call for hard money loans
Small Business Financing: Real estate owners who don’t qualify for traditional business loans due to a brief time in the business or bruised credit may resort to hard money loans. By tapping into property equity entrepreneurs can get the needed funds to expand their businesses, purchase inventory, or cover operational expenses.
Debt Consolidation: Sometimes real estate investors with multiple mortgages may leverage a hard money loan to consolidate debt. The ability to streamline multiple payments into one single payment can prove helpful to better manage outgoing payments while freeing up capital to pursue other investment opportunities.
Purchasing Distressed Properties: Hard money loans can be an investor’s best friend when it comes to snatching up distressed foreclosure and/or short sale properties at reduced prices. These properties can then be fixed up to later be sold for a profit— or refinanced into a traditional loan once the property is fully rehabilitated.
Emergency Repairs: Property owners who need quick cash to pay for unexpected repairs or renovations often find hard money loans to be just what they need. Damaged roofs, updating faulty amenities, or addressing urgent maintenance needs may require the cash that hard money loans provide.
Land Acquisition for Development: Investors can leverage hard money loans to buy raw land for future projects, this lets investors secure the land before embarking on the developmental side of things such as zoning changes, subdivision, and/or infrastructure improvements.
Bridge Financing for Construction Projects: There are times when real estate developers need short-term financing to cover the gap between construction phases. Hard money loans can be very useful in helping to complete these phases. Investors can then secure traditional financing or sell the property for a profit upon successful completion.
These are just some of the lesser-known scenarios in which hard money loans may prove helpful—if not crucial. It goes without saying that a proper analysis of a property’s risks, costs, and profits is needed, but hard money loans can be a great way to get that needed injection of quick cash.
When should you consider a Hard Money Loan?
These loans can be the much needed Hail Mary when traditional financing is unavailable or impractical. If you have a slim credit file and/or non-traditional sources of income and you’re looking to make a quick purchase, rehab a property, purchase an unconventional property, a hard money loan may be just right for you.
What are the benefits of hard money loans?
These loans can provide quick cash allowing you to strike when the iron is hot in regards to time sensitive opportunities. These are asset based loans so the focus is not on you or your credit scores, since these loans are secured by your property/assets the lender’s risk is reduced and you’ll have more flexible options.
What are the risks of hard money loans?
Well, hard money loans (as the name states) are for those “hard” scenarios and as such come with higher interest rates and shorter loan terms ranging from three months to a couple of years.
Give us a call at 361-334-7903 and let’s help you explore your best loan options. We invite you to leverage our lending experience so that you can confidently create a legacy of real estate wealth for your most cherished loved ones.
