Who Needs a Hard Money Loan?
Who Needs a Hard Money Loan?
If you’re looking for a way to finance a real estate investment, then you’ve probably heard of hard money loans. Also referred to as “bridge loans,” these are typically short-term loans provided by private lenders at a relatively high interest rate—sometimes as much as 18 percent. Because of the risk involved, lenders typically require the property as collateral. In some cases, they also require other assets such as the borrower’s home, vacation home, or retirement fund.
Since these terms aren’t as favorable as those from conventional lenders like banks, mortgage brokers, and credit unions, it’s logical that investors only use them in very specific circumstances:
- When time is a concern. Flipping homes is a time-sensitive business—and since it’s a business, an investor doesn’t have the time to wait weeks or even months for a conventional lender to approve a mortgage. Other bidders might snap up the property, and contractors will move on to another job. The sooner the investor can get to work, the sooner he or she can recuperate the investment and make the desired profit. Hard money loans can be approved in a matter of days, so investors don’t have to put their business on hold.
- When a conventional lender denies a loan application. A conventional lender will typically only finance a real estate investment if the investor has a good credit score, around 30 percent of the total sum available for a down payment, sufficient experience in the real estate business, and assets that can be used as collateral. A hard money lender is usually more lenient regarding these factors because first, the investor has to have a significant financial stake in the property and second, the risk of the loan is based on the after repair value of the property. As a result, hard money lenders are often willing to negotiate in situations where conventional lenders will not.
- When an investor has reached the limit of financed properties allowed by law. Currently, real estate investors are allowed to own up to 10 financed properties—but the truth is that most banks won’t approve anywhere near this many mortgages. For real estate investors who make their money flipping homes, it’s critical to have a reliable way to fund as many properties as they can reasonably manage at any one time. The larger their portfolios, the more profit they make—and the more resilient they are in the event something goes awry on a project.
- When an investor wants to finance a non-standard property or a property in a remote location. Conventional lenders prefer to finance “normal” properties that will remain in demand because they’re more likely to sell in the event of foreclosure. However, if an investor has done the research and can substantiate the projected ROI on a non-standard property with facts, then a hard money lender will probably see the business opportunity and approve the loan.
Clearly, hard money loans can be an effective way to finance real estate investments. That’s why real estate investors should always consider all their financing options before deciding on the right course of action.