Why would I need a hard money loan?
Because of their higher interest rates and shorter loan terms, hard money loans can sometimes seem unappealing or even downright scary! There are many situations, however, in which hard money loans are your best bet.
One business sector in which hard money loans have a distinct advantage is real estate investing. Investing in real estate is historically a very profitable and stable way to build wealth. One of the challenges that would-be entrepreneurs often face, however, is getting enough funding. Most traditional lenders are, naturally, hesitant about parting with the large sums of money that real estate investments often entail. People who are having a hard time obtaining loans from traditional lenders often find it easier to turn to hard money lenders for the capital they need in these circumstances.
What can a hard money loan be used to purchase?
Remember, a hard money loan is a short-term loan funded by private investors which is secured by real estate. One good thing about hard money loans is that they can be used to purchase almost every type of property, including commercial property, multi-family housing, residential property, industrial property, single-family housing, and land.
When is a hard money loan the right option for me?
A hard money loan is not ideal for all situations. For borrowers who have good credit, a stable income, and no instances of foreclosure and/or short sales in their financial history, it may be better to go through conventional financers like banks. Unfortunately, the traditional loan approval process can sometimes be quite lengthy. If your financial history does not qualify for a traditional loan or you need the money sooner, hard money loans may be your answer.
To summarize, hard money loans are suitable if the following conditions apply to you:
- you have credit issues in your financial history
- you want a construction loan
- you want a land loan
- you want to fix and flip a property
- or you need to act quickly.
Will getting a hard money loan give me an advantage over competitors?
Speed is one of the most decisive advantages of hard money loans over traditional loans. While funds from traditional loans can take over a month to qualify for and become available for you to use, funds from hard money loans usually take only about a week to become available, and the qualifications for the loan are less strict. This can put you at a serious advantage when bidding against competitors who are using traditional means of obtaining loans.
How do I take out a hard money loan?
Hard money loans use a process known as Trust Deed Investing. Private individuals with disposable income are willing to invest in individual loans or in a fund that manages a collection of loans. As the borrower, you will be required to place a down payment before obtaining the loan. The down payment is usually around 30% of the loan value, but the loan value can be as much as 100% of the cost of the real estate you want to purchase.
One great advantage of hard money loans is that you do not need to put up extra collateral. Instead, the guarantee on the loan will be your portion of the deed to the property itself.
Investors will also ask you for a solid business plan detailing how you will earn an income and pay off your loan.
What do hard money lenders get out of it?
Due to the loan amount and the term of the loan, hard money lenders often charge a higher interest rate than traditional lenders. Hard money lenders also usually ask for a larger down payment to mitigate any risks. Just as borrowers can get their money sooner, lenders also can get their money back sooner, since the cash flow is often structured to include distribution of interest every month to three months.
Ultimately, hand money lending can create a win-win situation for both borrowers and lenders!