Are you a real estate investor looking for fast funding options? Then hard money loans may be the option for you. They are quick loans that can be used to finance an investment property.
But they typically have higher interest rates than traditional loans. According to Bankrate, hard money loan interest rates can range from 7% to 15%.
In this blog post, we’ll explore in detail hard money loans and if they are the right choice for your next real estate investment.
What is a Hard Money Loan?
A hard money loan is a type of loan that is typically issued by a private investor or a group of investors. This loan is usually short-term. An average hard money loan term can range from a few months to a few years.
Your credit score does not affect your chances of applying for a hard money loan. You can borrow a loan from hard money lenders as long as you have collateral to offer. In hard money transactions, your loan is secured with your property as collateral.
How Do Hard Money Loans Work?
Hard money lending like other forms of lending has its process and criteria to make it work. A few essential elements make it a complete transaction, let’s have a look at them:
- The Lender: A private investor interested in the real estate sector can offer funds in hard money lending. Lenders like Kiavi offer real estate investors different types of loans to help finance an investment.
- The Loan Interest Rate: Be ready to pay at a high-interest rate. The average interest rate on a hard money loan is between 7% and 15% which is higher than the traditional mortgage rate.
- The Duration of the Hard Loans: A hard money loan has a shorter term period compared to conventional loans. You can qualify for private hard money loans that can last a few months or a few years.
- The Value of the Investment Property: Hard money lenders evaluate the value of the investment property to ensure it meets their criteria. They will issue you a loan for a percentage of the property’s value. This percentage is known as the loan-to-value ratio (LTV).
What is a Hard Money Loan Example?
Suppose you’re an investor looking to purchase a property. The home is in poor condition but has great potential to be sold as a flip.
But you don’t have enough cash to finance the purchase or cover renovation costs. Traditional mortgage lenders and banks will not sanction a loan looking at the condition of the home. A hard money lender can come to your rescue in this case.
They will evaluate the property to determine how much loan can be sanctioned. Let’s assume you wish to purchase a property at $100,000 and sell it at $200,000 after renovations.
The lender may offer you a fix-and-flip loan of up to 70% of the after-repair value (ARV) of the property. If the lender determines that the ARV is $200,000, they might be willing to provide a loan of $140,000 (70% of $200,000).
Now, the hard money lender will decide the duration and interest rate of the loan. They can propose a 12-month duration at a 12% interest rate. After using the hard money loans to fund and re-sell the house, you can repay the lender with interest.
Types of Hard Money Loans
- Fix-and-Flip Loans: These short-term loans are used by house flippers to purchase homes, renovate, and then re-sell them quickly for a profit. Fix-and-flip loans provide funds for both the purchase and renovation. Here the property itself serves as the collateral.
- Bridge Loans: Bridge loans help buyers to purchase a home while selling an existing property. These loans act like a bridge when the buyer cannot afford to buy a home while selling their current home.
- Construction Loans: These loans are used to fund construction projects. Unlike other loans, this loan is given in parts as the construction progresses. A portion of the loan is used to purchase the property once the construction is complete.
- Cash-Out Refinance Loans: Investors can use existing home equity to refinance their current mortgage into a loan. The cash-out refinance loan can go to purchasing an investment property or renovating the home.
- Land Loans: Land loans are loans used to fund undeveloped land. The interest rate of land loans is higher than other loans as it is a risky venture. Since vacant land is considered riskier collateral, the terms and interest rates for land loans are often higher than those for loans on improved properties.
Who Benefits From Hard Money Loans?
While hard money loans come with higher interest rates and fees, they also offer several benefits for various groups. Their quick funding options can be crucial in a competitive real estate market.
Additionally, hard money lenders don’t have strict underwriting guidelines. They may be willing to work with borrowers who have poor credit or financial histories. Let’s have a look at some of the individuals who benefit from hard money loans:
- Real Estate Investors: People who wish to invest in real estate benefit immensely from hard money loans. These loans get sanctioned more quickly than traditional mortgages.
- Flippers: Home flippers who want to fix a flip but do not have the funds can apply for hard money loans.
- Developers: A developer who wishes to construct a commercial property or build it, then they can definitely use hard money loans to fund their project.
Pros and Cons of Hard Money Loans
Pros of Hard Money Loans
- Quick Approval Process
- Flexible Loan Terms
- Your Credit Score Does Not Matter
For real estate investors, hard money loans offer several benefits. They provide fast funding options that allow investors to take advantage of opportunities quickly.
Hard money loans also offer flexible loan terms, which can be customized to meet the needs of each investor. In addition, hard money lenders do not have strict underwriting guidelines, which can make it easier for investors to secure financing for properties that are in poor condition.
Cons of Hard Money Loans
- Extremely High-Interest Rates
- Short Loan Terms
- Risk of Losing Your Property
While hard money loans can offer benefits to real estate investors, they also come with risks. The higher interest rates and fees associated with these loans can make them more expensive than traditional loans.
In addition, hard money loans typically have short loan terms, which means investors may need to refinance or sell the property quickly to repay the loan.
Finally, hard money loans may have limited availability for certain property types, such as owner-occupied homes. If the borrower defaults on the loan, the lender may foreclose on the property.
Final Thoughts
If you’re a real estate investor looking for fast funding options, hard money loans and hard money lenders might be the right choice for you. These loans are backed by the value of the property you’re investing in, rather than your credit score or financial history, which makes them a popular option for real estate investors who need funding quickly.
While they may come with higher interest rates and fees, they offer several benefits that make them a worthwhile investment option.
FAQs
What are the Typical Fees Associated With Hard Money Loans?
Typical fees associated with hard money loans include an origination fee, underwriting fee, and servicing fee. These fees can vary depending on the lender and the loan terms.
How are Hard Money Loan Rates Determined?
Hard money loan rates are typically determined by the lender's risk assessment of the borrower and the property. Factors that can affect the rate include the borrower's credit score, the property's location and condition, and the loan-to-value ratio.
What are the Benefits of Using a Hard Money Lender?
Benefits of using a hard money lender include faster funding, flexible loan terms, and the ability to finance properties that may not qualify for traditional financing. Hard money lenders may also have less strict underwriting guidelines than traditional lenders.
4. What is a hard money lender?
A hard money lender is an individual or company that specializes in issuing hard money loans to real estate investors. Unlike traditional lenders like banks and credit unions, hard money lenders don't have strict underwriting guidelines, which makes them a popular option for real estate investors who need funding quickly.
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