A few solutions exist for financing a real estate investment. One becoming increasingly favored is the hard money loan.
Many would envision a fast business deal at this thought, which could relatively sum up the concept. Visit https://bdcmagazine.com/2022/01/the-pros-and-cons-of-hard-money-loans-when-investing-in-real-estate/ to learn the advantages and downsides of private lending with real estate investing.
Private lenders provide a rapid, nonconforming, short-term financial solution when an investor needs fast cash. These are not your traditional lenders, nor do they follow the same stringent guidelines. The hard money lender is more lenient in their criteria and focused on assets as opposed to credit or financial standing.
These loan products come from individuals or private companies that base their funding on assets or investment properties. Essentially, it’s sort of investors providing funding for other investors.
Borrowers welcome the alternative to traditional lending since it can be challenging to qualify, considering the more stringent eligibility criteria. Others choose these loans because the process is fast and straightforward, with little hassle or stress – making them a good idea for the savvy investor.
Is A Hard Money Loan the Right Choice?
In the same vein as a traditional loan, hard money loans are secured, meaning collateral is required to receive funding. Collateral, such as the property you purchase, will guarantee the loan. The borrower receives good hard money in exchange for the lender holding the asset.
The expectation is that the exchange will be brief, with the funds repaid in a timeframe of between one and five years. Because these loans are more lenient than the traditional platform and for a much shorter term, the lenders attach higher rates to stave some of the risk.
The provider is relatively assured of recovery if the loan defaults because they can recoup their investment by selling your property. This makes the asset’s value the primary factor for determining loan approval.
These loan products aren’t necessarily the right choice for every investor, not only due to the higher rates but because they aren’t meant to be held for a long term, and in some cases, an investor may be asked to add a larger down payment to help secure the loan.
The hard money loan is a favored choice for rehab enthusiasts, developers, and investors searching for properties to fix/flip.
They offer a fast solution and are relatively simple to get when investing in a property. While you may have a higher rate, the benefit of a quick and easy financial solution justifies the charge.
Why People Use Hard Money Loans
Hard money lenders are integral in real estate financing. These private lenders offer investors an alternate resource to obtain funding when conventional lending options are not viable. Unlike the traditional platform, the private loan provider is asset-focused as opposed to being concerned with income or credit. Go here to learn about hard money lending.
The greater the property value, the less risk to the lender if the loan defaults. The borrower will further secure the loan with a down payment. The private lender typically limits the available loan amount to roughly 70 percent of the value based on asset type.
Why would investors follow this path instead of using a more traditional route for their loan financing? Here are a few reasons hard money loans are a good idea.
In and out
Many borrowers prefer the speed associated with hard money lending; it’s a relatively in-and-out process. Most can’t afford the time required with a conventional bank or credit union with their underwriting protocol. Real estate is a fiercely competitive industry.
Sellers prefer offers that come with the shortest closing timeframe. These usually involve minimal stress or hassle. A private loan provider allows the investor to accommodate the seller’s needs and preferences. Speed is among the top reasons investors believe hard money loans are the best financial solution for them.
Flexibility
A private lender can afford borrowers greater flexibility than a conventional platform; they can be somewhat more creative with their solutions.
In a traditional setting, the lenders target a specific structure and perform a high volume of loans, giving them little room for flexibility or stepping outside the box.
Private lenders offer two products: the Bridge Loan and the Fix & Flip Loan.
The Fix & Flip Loan
With a Fix & Flip product, the investor has a chance to gentrify neighborhoods, albeit maintain minimal out-of-pocket contributions while the project is underway.
The Bridge Loan
Hard money loans such as the Bridge Loan are offered with terms ranging between 6 and 18 months. The investor is required to fund roughly 30 percent of the property’s purchase price. The hard money lender will offer a loan for the remainder using this loan type.
Because these are very short-term, an investor’s “exit strategy” often involves refinancing using a conventional longer-term product.
It’s not uncommon for private loan providers to attach an interest payment guarantee to this loan. The lender needs assurance they will earn interest with their product.
For this reason, many will stipulate an approximate 3- or 6-month interest payment guarantee designating the minimum number of interest payments needed before the borrower can repay or refinance the loan.
If either of these things are done before the stipulated period, the borrower will be responsible for the difference in minimum interest unearned. Most investors recognize this as a fair and reasonable stipulation.
Final Thought
Borrowers find hard money loans a good idea for numerous reasons, including and aside from what’s been outlined here. These private loan providers are pivotal as a fast, efficient, and simple financial solution for investors who want in and out of their business deal with minimal stress and hassle