Are you looking for extra cash to help you navigate financial hardship or fund a business or home improvement project? Taking out a loan can seem like the best option. However, with so many financing options available, the hassle lies in choosing the best loan option that suits your circumstances. On that note, here’s everything you need to know about hard money loans and why they may be suitable for you.
What is a hard money loan?
A hard money loan is a form of financing that’s available for borrowers who are looking to repair or purchase an investment property. It doesn’t conform to the structure of a traditional loan or to conventional loan standards, which is why mortgage brokers or banks don’t typically offer them. For starters, a hard money loan is backed by a ‘hard’ asset, meaning a tangible and profitable property that can quickly repay the loan. A traditional loan, on the other hand, is backed by the borrower’s creditworthiness, which is why things like a low credit score can hinder a person from access to a traditional or conventional loan.
Furthermore, a distinct attribute of hard money loans is that the loan amount is determined based on the future after repair value (ARV) instead of the property’s current (as-is) value. As a result, a borrower will have access to a higher amount of leverage to handle a distressed real-estate property than they would have gotten from the traditional financing option.
For instance, assuming a business owner wants to purchase a restaurant but doesn’t have the funds. A hard money loan could be the best finance option because he can use the restaurant as collateral, and the loan amount received should be able to cover both the cost of purchasing the restaurant and repairs.
This means the new restaurant owner can get to work immediately by getting an affordable appliance repair service or technician with years of experience to fix some essential equipment like the refrigerator, microwave, washer, and dryer. In a nutshell, hard money loans are an alternative to the typical bank or conventional mortgage loan. However, the difference lies in the loan term, approval process, and the loan’s purpose.
How does a hard money loan work?
Unlike a bank mortgage lender, who will want to dig into your credit history in order to understand if you can afford the monthly payments, a hard money lender focuses on the deal itself. They’ll want to know if the financials for the project are reasonable and correctly calculate the ARV to ensure you can sell the property at a profit and repay the loan in a timely manner.
For instance, if you’re a real estate investor in Grand Rapids, Michigan who wants to renovate a house, you’ll most likely need to change the house’s windows, roof, and flooring. To do this, you first need to search online for “Grand Rapids house windows” and to find reputable window installers who can provide quotes for vinyl replacement windows and other reliable new window options.
These estimates will help you determine the exact amount you’ll need to cover the renovation costs. Then, where you don’t have the funds, you can approach a hard money lender. They’ll review several factors like your debt-to-income (DTI) ratio, home equity, and loan-to-value (LTV) ratio. Once you meet the requirements, the loan will be approved and issued.
So you see, you don’t need to have a fantastic credit history to secure a hard money loan, since the loan is backed by the property. This means that the moneylender can resell the property themselves if you’re unable to follow through with the repayment schedule.
How to decide if it’s right for you.
Without a doubt, hard money loans aren’t for everyone as they typically target homeowners and real estate investors. So, just before you type “hard money lenders near me” in your search box, here are a few things to consider as you determine if a hard money loan is right for you.
- Hard money offers quick access to cash. Assuming you’re an investor in the real estate industry who has just sighted a property you believe is a good investment. However, it would help if you beat the competition quickly—this is where a hard money loan is advantageous. A hard money loan is a quick way to finance investment as it’s faster than traditional loans that typically take 30-45 days.
- Hard money is a great option if your credit history isn’t great. As a new investor in the real estate industry, you’ll likely face challenges securing a traditional loan to acquire a property, even if you fall into a high-income bracket. This is because you don’t have a good income history to back it up. Also, things like foreclosures, short sales, and card issues can impact a person’s ability to secure a conventional loan. So, if you’re in a situation like this, a private money loan is right for you.
- Hard money offers you an easy way to acquire a new real estate property. A hard money loan is an excellent choice if you want to acquire a property, fix it up, and flip it immediately. This means you’ll be able to pay back the loan within a short amount of time, and the high-interest rate charged by the private lender or private investor will not be a problem for you.
There are plenty of pros and cons when it comes to opting for a traditional loan or a private lender. Consider the property value and how big a project your investment will be in order to make the best choice for your needs.