The basics of understanding what is a hard money loan represents the first step of breaking down real estate financing. Hard money loans are, after all, a real estate investor’s best friend; they are the quickest path to securing a deal. Nonetheless, hard money lending can get complicated quickly, so you need to realize what you are getting into before making any decisions for yourself.
When exploring real estate hard money lending, you need to comprehend several questions: What are the pros and cons of such a strategy? When should you use private financing for real estate
? Where can you find hard money lenders for real estate? The more you know about hard money, for that matter, the better. This guide should serve to lay a solid foundation for everything you need to know about one of today’s greatest sources of capital.
What Is Hard Money Lending?
Hard money lending
is a short-term loan obtained from private investors or individuals at terms that may be stricter than a traditional loan. Though the terms of this creative financing option may be stricter, this form of private financing for real estate generally has more lenient criteria.
Hard Money Lending FAQs
1. The Big-Picture of Hard Money Lending
Hard money lending
is another way investors can finance their real estate projects outside the traditional mortgage means. This short-term loan is secured from private investors or individuals instead of other traditional institutions like banks or credit unions.
Hard money lending is often used by investors who aim to improve or renovate a property and sell it. Given that you can usually get a loan in a matter of days (as opposed to weeks from banks), this is a fine choice for house flippers and real estate developers. This is also an option for investors who only need quick fixes to raise a property’s value, then secure another loan based on the new value to pay off the Arizona hard money lender
2. Hard Money Lending Vs. Other Lending Types
The main difference between hard money lending
and other types of loans is that this financing does not focus on your credit history or income as collateral. Instead, lenders will see the property’s value as the determining factor, emphasizing its after-repair value (ARV). ARV is the worth of the property once your renovations are done.
Other differences include:
Money lenders do not invest in primary residences. Owner-occupied residential properties are subject to many rules and regulations, thereby increasing the risk for lenders.
Hard money lenders do not sell loans to Freddie Mac or Fannie Mae. Often, lenders use their own money or raise it from a pool of investors. The loan amount is based on their property specialization (if there are any) and the risks they are comfortable taking.
Hard money loans phoenix
are short term. You will not have the luxury of 15 to 30 years to repay your loans. Hard money loans typically needing to be repaid anywhere between 6 to 18 months.
Hard money lenders Arizona
have their own lending criteria. A private lender, for example, could be your friend, family, or business associate. As such, they may not have any preset criteria before lending you money, giving you more flexibility in negotiating terms. Hard money lenders, on the other hand, come with a specific set of upfront points, interest rates, and defined durations.
3. What Are Hard Money Loans Used For?
Imani Francies, an investing expert with Loans.com
, says that “loans of last resort or short-term bridging loans are called hard money loans. Real estate serves as collateral for a hard money loan. Due to their lack of red tape, hard money loans are ideal for wealthy investors who swiftly need funds for an investment property”.
Hard money loans are also commonly used for fix and flip properties
. These investors may be less worried about higher interest rates because the end goal is to sell the property for a profit once the rehab is finished. Hard money loans make a perfect fit because they can be used to purchase properties and make renovations.
The Pros And Cons Of Hard Money Loans
Hard money loans represent one of the single most advantageous funding opportunities for investors to take advantage of. If any, few sources of capital can compete on the same level as hard money and offer the same competitive edge. After all, it is hard money loans that many investors must thank for acquiring their deals in the first place. That said, hard money is not without its caveats. Loren Howard from Real Estate Bees states that “hard money loans are fast to approve and fund
and can speed up the entire real estate investment process. However, they have much higher rates than a traditional loan and are not suited for non-real estate investors”. Despite its superior benefits, there are downsides to hard money that warrant the consideration of every investor.
Let’s look at the pros and cons of Arizona hard money
so you can weigh the pros and cons yourself.
Speed: The Dodd-Frank Act is a financial reform legislation enacted in the past decade. It came with new regulations on mortgage lending, which means a lot of time (often, months) is needed for an investor to close a loan. On the other hand, hard money lending is fast, as you can secure a loan in days or weeks (depending on negotiations). Time is essential, especially for large development projects, and hard money lending can help speed that process along.
Collateral: With hard money financing, the property itself is your collateral for the loan. Some lenders even accept other assets, like your retirement account or residential property under your name, as a basis for starting a loan.
No “Red Tape”:
Getting a hard money loan for an investment property
with a traditional mortgage is difficult, if not impossible. Traditional borrowers need to worry about credit score, LTV ratios, debt-to-income, and several other indicators they need to meet criteria for. However, Arizona hard money lenders
function as asset-based lenders who are more concerned with the property than the borrower’s credentials.
: There is something to be said for the convenience of closing with cash. Supplying a lender with bank statements, income documentation, tax returns, and leases can become overbearing and consume your focus and energy. On the other hand, hard money cuts out the middleman
and causes many headaches.
Volume: Hard money lenders allow investors to leverage other people’s money. That means investors could potentially fund more than one deal at a time. Traditional loans will do no such thing. You should consider a hard money loan if you want to fund multiple deals at a time.
: Arizona Hard money
allows investors to beat the competition, or at least those using a traditional loan. If for nothing else, sellers prefer the two things hard money offers: cash and a timely transaction.
Cost: The convenience of hard money lending may be its primary benefit; however, it is also its main drawback. Given that hard money lenders are at higher risk than borrowers, many may demand up to 10 percentage points higher than traditional loans. Interest rates range from 10 to 15 percent. Expect other fees to also be relatively increased, including origination fees and closing costs.
Short Repayment Schedule: A shorter repayment period is the price to pay for getting a property listed on the market ASAP. This can be anywhere between 6 to 18 months. Make sure that you can sell the property and profit the soonest time possible.
Hard Money Loan Rates
Hard money loan rates are typically much higher than fixed-rate mortgage loans. Compared to the average 5.5% fixed-rate mortgage loan, a hard money loan typically falls between 8% and 18%. In addition, hard money loans may not cover the full value of the property you seek to finance. If a hard money loan
does not cover the full value, you may be required to present a higher down payment on the property
or find an additional source of financing to close on the deal.
When To Use Hard Money for Real Estate
Though Arizona hard money lenders
will often issue loans for almost any type of property, certain types of property investments were absolutely made for hard money. Rehab projects, construction loans, and land loans were made to be financed through hard money.
For example, when flipping a house investor need access to funding for both the purchase and renovation costs. André Disselkamp from Finsurancy
advises that “these projects typically happen on a quick timeline, meaning investors do not have time to wait through the process of a traditional loan approval”.
This doesn’t mean that other types of investments should not be financed through hard money. If you, the buyer of a property, have credit issues, or you need to act quickly on a deal before it disappears, the speed and convenience afforded by a hard money
loan can be worth its weight in gold. In these cases, hard money loans can be used to purchase residential or commercial properties.
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.