There are many types of loans available for real estate investors, but individuals who are looking for short-term loans that have high approval rates can consider hard money loans. This type of loan has a lot of benefits — but of course, like anything that involves money — some things should be considered.
While veteran investors are already knowledgeable about different types of loans, investors that are only new to the market must conduct adequate research before borrowing money. Thankfully, this article is here to help you! We will walk you through the ins and outs of hard money loans, so you will be able to decide whether or not this is the right fit for your needs.
What are Hard Money Loans?
Often used as a more convenient alternative to the usual bank loans, hard money loans are mostly utilized by investors to finance real estate projects. Hard money loans are also sometimes called short-term bridge loans.
Lenders that offer hard money lending often require collateral, which takes the form of physical property. Collaterals are needed for hard money loans since lenders base their terms on the collateral’s value before making a transaction, not the borrower’s credit score.
Property-flippers — people who plan to renovate the real estate used as collateral using the finances provided by the loan — are the most common individuals who seek out hard money loans and largely benefit from them. This is because they only own the property long enough to increase its value, a surefire way to gain income!
The Benefits of Hard Money Loans
- You Don’t Need a High Credit Score
You are not left with absolutely no options when you have a low credit score, since most hard money lenders do not base on a borrower’s credit score — as stated above. Even if your real estate is at risk of foreclosure and it is already stated on your credit report, there is still a high chance that you can still get a hard money loan. The reason for this being: Lenders prioritize the value of the collateral, and the equity it may bring.
- Your Chances of Approval are Higher
Unlike traditional bank loans that take a much longer time to process, most hard money lenders only take a day to process and approve your application for a loan. Experienced professionals at Newsilver.com pointed out that some lenders can even approve your hard money loan much faster, and you can even get approval in under ten minutes! These high approval rates make hard money loans a more convenient and quicker way to get finances for your real estate project. Also, funds often only take 3-5 days to process!
- You Only Need a Few Requirements
Often, the most basic requirement that you need for a hard money loan is equity or downpayment — the rest will depend on the lender you choose. The reason for this is that lenders spend less time checking and verifying your income and other financial documents, as their main focus is the collateral you offer. The few requirements needed in this type of loan speeds up the approval process.
Things to Keep in Mind When Getting a Hard Money Loan
- Hard Money Loans are only for the Short Term
The reason why hard money loans are also called short-term bridge loans is that they usually only span for one to three years. This is because prolonging the payment for this type of loan increases the interest you have to pay, and lessens the chances of you paying off the loan. Thus, it is only advisable to keep the time span short.
- Hard Money Loans Require a Downpayment
Because of its fast approval process and flexibility, lenders reasonably require their borrowers to provide down payment either in the form of equity in collateral or cash. This is an important thing to keep in mind because you cannot delve into a hard money loan with empty pockets.
- Hard Money Loans Typically have a High-Interest Rate
Another thing to keep in mind when getting a hard money loan is the cost of its interest. Because hard money loans are much more convenient, get approved quickly, and funding takes only a short time to be delivered — it usually has higher interest rates than traditional bank loans. While it usually isn’t the case, you must be prepared for double-digit interest rates as they are quite possible.
Amidst many types of loans available for investors, hard money loans are surely one of the fastest and most convenient ways to get finances for your real estate project. However, like in most transactions, an investor must first gather all the knowledge they need to get before making decisions.
So, as long as you read the terms carefully, conduct adequate research, and make sure that you are financially prepared — then you are already good to go!